THE 

SINKING  FUNDS 
OF 

NEW  YORK  CITY. 

BY 

EDGAR  J.  LEVEY, 

X  Deputy  Comptroller. 


Reprinted  from  MUNICIPAL  AFFAIRS,  for  December,  1900. 


lEx  IGihrtfi 


SEYMOUR  DURST 


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THE  SINKING  FUNDS  OF  THE  CITY  OF  NEW  YORK. 


By  Edgar  J.  Levey. 


The  Sinking  Fund  system  of  the  City  of  New  York  has  long 
been  shunned  by  the  casual  student  of  municipal  affairs  on  account 
of  its  intricacies  and  difficulties,  which  have,  indeed,  sometimes 
been  exaggerated.  That  this  system  is  far  from  simple  cannot  be 
denied;  but  it  is  by  no  means  true  that  its  complexities  are  so 
great  as  to  offer  serious  obstacles  to  the  understanding  of  any  in- 
telligent investigator.  Even  in  its  most  defective  features,  it  is  a 
natural  outgrowth  from  the  financial  conditions  of  the  past 
century,  and  a  brief  narrative  of  those  conditions  will  serve  to 
explain  the  existence  of  many  peculiarities  which  might  otherwise 
seem  anomalous. 

Before  taking  up  for  review  the  history  of  the  New  York  city 
sinking  funds,  it  is  desirable,  however,  to  appreciate  at  the  outset 
the  difference  between  the  conditions  under  which  sinking  funds 
are  established  by  national  and  by  municipal  governments.  Na- 
tional governments  are  supported  largely,  if  not  chiefly,  by  indi- 
rect taxation  and  by  revenues  uncertain  in  amount,  in  consequence 
of  which  there  can  be  no  exact  or  scientific  correspondence  betw^een 
budgetary  appropriations  and  treasury  receipts.  Their  budgets 
may  fall  within  the  limits  of  these  revenues  or  they  may  exceed 
them.  In  the  one  event,  there  is  a  treasury  surplus;  in  the  other, 
a  deficit.  If  the  maintenance  of  a  sinking  fund  be  not  treated  as 
a  preferred  obligation  over  other  items  in  a  national  budget,  the 
moneys  which  should  be  applied  to  it  are  usually  the  first  to  be  di- 
verted to  the  more  pressing  exigencies  of  current  expenditure,  and 
its  growth  is  continually  interrupted.  If,  on  the  other  hand,  the 
maintenance  of  a  sinking  fund  be  treated  as  a  preferred  obligation, 
it  will  necessarily  happen,  in  years  of  deficient  revenue,  that  the 
nation  must  become  otherwise  indebted,  partly  or  wholly  as  a  re- 
sult of  such  sinking  fund  maintenance.  In  other  words,  faithful 
redemption  of  old  debt  merely  results,  under  such  conditions,  in 
the  incurring  of  new  debt,  and  sometimes  at  a  higher  rate  of  inter- 
est.    This  is  precisely  what  happened  to  England  during  the 


2 


period  of  heavy  borrowing  between  1785  and  1829,  when  about 
£330,000,000  were  borrowed  at  about  five  per  cent  in  order  to  re- 
deem the  same  amount  of  debt  at  four  and  one-half  per  cent, 
resulting  in  an  annual  interest  loss  of  £1,627,765  for  43  years. 

The  frequent  changes  of  policy  in  regard  to  the  maintenance 
of  sinking  funds  by  both  the  governments  of  Great  Britain  and  the 
United  States  have  been  attributable,  principally,  to  these  causes. 

In  the  municipal  governments  of  to-day,  however,  the  raising 
of  annual  revenue  follows  as  a  direct  consequence  of  the  framing 
of  the  annual  budget,  and  the  extent  of  that  revenue  is  made 
dependent,  with  almost  scientific  exactness,  upon  the  size  of  each 
budget.  In  American  municipalities  direct  taxation,  if  not  the 
sole  means  of  revenue,  is  at  least  the  residual  factor,  determined 
(through  the  medium  of  a  tax  rate)  by  the  requirements  of  the 
annual  appropriations.  There  should  be,  therefore,  neither  surplus 
nor  deficiency,  and  the  causes  which,  in  national  governments, 
give  rise  to  temporary  suspensions  of  debt  amortization  and  dis- 
arrangement of  sinking  fund  policies  are  wholly  absent.  There 
are,  in  contemporary  municipal  governments,  no  obstacles  in  the 
way  of  scientific  debt  redemption,  unless  those  obstacles  be — as 
they  are  in  the  case  of  New  York  city — inherited  from  the  mis- 
takes of  the  past. 

THE  SINKING  FUND  OF  1813. 

It  is  not  difficult  to  understand  why  the  sinking  fund  of  the 
city  of  New  York  was  originally  framed  upon  defective  principles. 
The  funded  debt  of  the  city  had  its  beginning  in  1812,  when 
authority  was  obtained  from  the  legislature  to  issue  bonds  to  the 
amount  of  $900,000  to  fund  floating  indebtedness  which  had  been 
incurred  by  the  city  partly  on  account  of  the  construction  of  the 
present  city  hall  and  other  public  buildings.  The  act  of  the  legis- 
lature of  June  8,  1812,  did  not  attempt  to  pledge  any  specific 
revenues  of  the  city  for  the  redemption  of  the  bonds  thereby 
authorized  to  be  issued,  but  sweepingly  declared  that  '^all  and 
singular,  the  revenues  of  the  Mayor,  Aldermen  and  Commonalty 
shall  be  and  they  are  hereby  pledged  and  appropriated  for  the  pay- 
ment of  the  interest  which  shall  become  due  on  the  said  stock." 

In  1813  Comptroller  Thomas  E.  Mercein  took  steps  looking 
towards  the  ultimate  redemption  of  the  principal  of  this  debt  and 
recommended  to  the  common  council  the  establishment  of  a  sink- 
ing fund  for  this  purpose.    At  that  time  expenditures  of  the  city 


government  weie  not  strictly  limited,  as  now,  by  ap])ropriations 
made  in  advance  of  the  incurring  of  liability.  Public  woik  was 
performed  and  supplies  were  furnished  upon  the  orders  of  the 
common  council ;  and,  while  the  local  authorities  were  compelled 
to  furnish  to  the  legislature  estimates  of  expense  in  order  to  obtain 
annual  authority  to  levy  taxes,  there  was  no  substantial  corre- 
spondence between  these  estimates  and  the  liabilities  actually 
incurred  from  time  to  time  by  the  common  council.  Moreover,  in 
the  early  part  of  the  nineteenth  century,  the  miscellaneous  reven- 
ues of  the  city  formed  a  much  larger  proportion  than  now  of  the 
total  receipts  of  the  city  treasury,  and  to  this  extent  taxation  was 
a  less  important  factor  in  determining  the  limits  of  annual  expen- 
diture. There  were  at  that  time  frequent  annual  defi  "its,  and 
the  whole  financial  system  bore  more  resemblance  to  the  state 
of  the  national  finances  than  it  did  to  the  better  ordered  budgetary 
methods  of  modern  nmnicipalities. 

When  Comptn^ler  Mercein  first  broached  the  idea  of  a 
municipal  sinking  fund  for  the  city  of  New  York,  the  ideas  of  the 
preceding  century  in  regard  to  what  constituted  "funded  "debt 
still  persisted  to  a  considerable  degree.  Debt  was  regarded  as 
"funded"  when  based  upon  the  pledge  or  mortgage  of  specific 
revenues.  The  state  of  the  public  credit  then  was  not  unlike  that 
of  China  to-day,  in  that  creditors  demanded  a  tangible  or  visible 
guarantee.  As  Professor  Ross  states  of  the  early  English  loans  : 
"By  this  '  funding '  policy  the  public  debt  came  to  consist  of  many 
small  loans,  each  bottomed  on  its  own  petty  item  of  revenue. 
This  complicated  and  rigid  system,  wherein  the  growth  of  one 
source  of  income  could  not  be  used  to  eke  out  the  shrinkage  of 
another,  proved  unfit  for  a  growing  public  finance."^  It  will  be 
noted  hereafter  how  a  somewhat  similar  system  has  proved 
equally  unfit  for  the  growing  public  finance  of  the  city  of  New 
York. 

Comptroller  Mercein  had  before  him  the  examples  of  the 
United  States  and  British  governments,  which  had  established 
sinking  funds  based  upon  pledges  of  specific  revenues.  Perhaps 
he  may  also  have  been  influenced  by  the  fact  that  it  was  doubtless 
easier  then,  as  it  is  now,  to  secure  for  any  purpose  the  appropria- 
tion of  miscellaneous  revenues  of  the  city  than  moneys  raised 
directly  by  taxation.    Merceiu's  scheme  contemplated  the  pledging 

'  Sinking  Fundu,  p.  9. 


4 


of  commutation  of  certain  water  lot  rents  and  quit  rents;  licenses 
for  pawnbrokers,  second-hand  dealers,  hackney  coaches  and  street 
vaults;  market  rents  and  fees  and  twenty-five  per  cent  of  the  pro 
ceeds  of  sales  of  real  estate  belonging  to  the  corporation  (after- 
wards changed  to  all  the  proceeds  of  the  sale  of  real  estate  belong- 
ing to  the  corporation  in  1825).  He  estimated  that  these  revenues 
would  provide  the  sum  of  $400,000  by  January  1,  1827,  when  the 
city  stock  became  payable,  leaving  $300,000  to  be  otherwise  pro- 
vided for.  On  August  9,  1813,  an  ordinance  in  substantial  con- 
formity with  his  recommendations  was  passed.^  The  preamble  of 
this  ordinance  read  ''whereas,  it  is  highly  useful  to  establish  a 
fund  out  of  which  purchases  of  the  New  York  city  stock  may  from 
time  to  time  be  made,  whenever  the  same  can  be  done  at  par  or 
the  true  value  thereof,  whereby  the  said  stock  will  be  prevented 
from  depreciating  and  the  redemption  of  the  same  will  be  regularly 
progressing,  therefore,"  etc.,  etc. 

The  history  of  this  sinking  fund  from  1813  to  the  date  of  its 
re- organization  by  the  sinking  fund  ordinance  of  February  22,  1844, 
does  not  call  for  particular  description,  except  that  attention  may 
be  called  to  the  financial  inconvenience  experienced  from  time  to 
time  by  reason  of  the  accumulation  of  unnecessarily  large  annual 
revenues,  which  fluctuated  between  $10,146.80  in  1814  and  $176,- 
556.55  in  1843. 

Although  the  legislature,  by  several  enactments  following  the 
Act  of  1812,  had  made  the  sinking  fund  provisions  of  the  ordinance 
of  1813  applicable  to  loans  issued  under  their  provisions,  on  Decem- 
ber 10,  1832,  the  comptroller,  Mr.  Talman  J.  Waters,  called  the 
attention  of  the  common  council  to  the  fact  that  the  cash  accumu- 
lations of  the  fund  amounted  to  $311,101.49  ;  that  the  outstanding 
city  stock  could  not  readily  be  obtained  for  purchase,  as  shown  by 
the  fact  that  "  since  the  15th  July,  1831,  there  have  been  but  thiee 
transfers  of  that  stock,  and  they  not  for  sale  but  for  apportion- 
ment of  estates";  and  asked  the  question:  "What  shall  be 
done  with  the  accumulations  of  the  sinking  fund  account  ? "  He 

1  Reeaacted  with  slight  variations  in  the  revisions  of  1817  1821,  1823, 1827  and 
1834.  The  commissioners  named  were  ti)e  mayor,  recorder,  city  treasurer  (cbamber- 
laiu),  comptroller,  and  chairman  of  the  fiuiince  committee  of  the  board  of  aldermen. 
Until  the  passage  of  the  Greater  New  York  charter  in  1897,  when  the  president  of  the 
council  was  substituted  for  the  recorder,  no  change  was  made  in  the  composition  of  this 
body,  except  that  during  the  existence  of  bicameral  local  legislatures,  the  chairmen  of 
the  finance  committees  of  both  houses  weie  commissioners  of  the  sinking  fund,  ex  officio. 


5 


called  attention  t(  »  the  fact  that,  exclusive  of  sales  of  real  estate, 
the  average  revenue  of  the  fund  would  be  sufficient  to  redeem  the 
outstanding  bonds  in  less  than  seven  years,  though  those  bonds 
had  seventeen  years  to  run,  an; I  he  recommended  that  $3(i0,000  of 
the  sinking  fund's  cash  be  applied  to  the  payment  of  bonds  of  the 
corporation  (not  by  the  terms  of  their  issue  redeemable  from  the 
sinking  fund)  held  by  the  Bank  for  Savings.  ^  This  recommenda- 
tion (entirely  justifiable  by  the  financial  condition  of  the  sinking 
fund,  but  as  objectionable,  from  a  technical  standpoint,  as  many 
suggestions  destined  to  be  made  thereafter  in  regard  to  similar 
conditions)  was  reported  on  favorably  by  the  finance  committee 
of  the  common  council,  who  entered  into  an  extended  argumenta- 
tive defense  of  the  proposition. 

The  committee  was  of  the  opinion  that  ^'the  case  under  con- 
sideration is  one  of  a  different  character  from  that  which  would 
exist  if  the  corporation  were  to  pay  its  current  engagements  as 
they  are  contracted  from  year  to  year  out  of  the  sinking  fund. 
That  would  clearly  be  a  violation  of  the  intention  and  purpose  of 
the  act,  inasmuch  as  it  would  put  in  jeopardy  that  sacred  and 
ample  security  which  the  legislature  has  reserved  for  the  public 
creditor."  This  virtuous  declaration  was  not  accompanied  by 
reference  to  the  fact  that  the  bonds  proposed  to  be  redeemed  had 
been  originally  issued  for  current  expenses  and  intended  to  be 
merely  temporary  loans  to  be  paid  from  the  proceeds  of  taxes,  which 
had  not  been  forthcoming. 

This  early  difficulty,  which  was  followed  by  numerous  other 
advances  of  the  surplus  revenues  of  the  sinking  fund  for  general 
treasury  purposes,  foreshadowed  many  later  experiences  in  the 
management  of  the  sinking  fund;  among  them,  (1)  that  the 
revenues  of  municipal  sinking  funds  can  with  difficulty  be  used  to 
purchase  before  maturity  bonds  held  by  the  public  ;  (2)  that  one 
of  their  most  useful  functions  is  in  absorbing  new  funded  debt  as 
it  is  issued  from  time  to  time;  and  (3)  that  sinking  funds  based  on 
pledges  of  specific  revenue  lead  to  the  greatest  financial  inconveni- 
ences without  any  corresponding  advantages. 

In  183-i  the  comptroller  again  called  att(Mition  to  th(?  inijiracti- 
cability  of  making  investments  as  directed  by  the  ordinance,  in 
consequence  of  the  very  high  prices  maintained  by  the  several 
stocks  therein  designated,  and  renewed  a  former  suggestion  that, 

1  DocumenU  B'L  of  Aid.,  Vol.  II,  No.  (30. 


6 


inasmuch  as  a  judicious  investment  of  the  funds  could  not  be  made 
in  conformity  with  the  ordinance,  they  might  be  applied  to  the 
payment  for  such  real  estate  as  the  common  council  might  deem 
it  necessary  to  purchase  for  public  purposes.' 

On  March  4,  1834,  an  ordinance  was  adopted  (subsequently 
followed  by  many  of  a  similar  character)  authorizing  the  commis- 
sioners of  the  sinking  fund  to  invest  in  the  purchase  of  lands  for 
the  extension  of  Grand  street,  Essex  and  Centre  markets,  provid- 
ing at  the  same  time  that  "  the  whole  of  the  rents,  fees  and  income 
of  said  markets  in  their  improved  state,  and  the  land  thus  pur- 
chased, are  hereby  appropriated  and  pledged  for  payment  of  the 
principal  and  interest  of  the  sum  that  shall  be  thus  drawn  from 
the  said  fund. "  ^ 

These  occasional  diversions  of  the  fund  did  not  appear,  how- 
ever, to  confine  its  growth  within  the  limits  of  its  original  purpose. 
On  January  1,  1840,  the  total  funded  liabilities  of  the  city  amounted 
to  $7,716,105.78,  of  which  $5,473,730  consisted  of  water  stock,  with 
he  redemption  cif  vrhich  the  sinking  fund  had  been  charged  on 
May  7,  1835.  In  his  report  for  the  year  1839,  Comptroller  Alfred 
A.  Smith  called  attention  to  the  fact  that  the  revenues  of  the  sink- 
ing fund  "assigned  originally  to  pay  off  a  debt  of  a  few  hundred 
thousand  dollars,  not  yet  due  by  ten  years,  are  amply  sufficient  to 
extinguish  the  whole  funded  liabilities  of  the  city  as  they  mature, 
with  the  exception  of  about  two  millions  of  the  water  loan  redeem- 
able in  1860  ;  and  this,  too,  without  impairing  its  present  capital 
or  resorting  to  the  claim  for  money  heretofore  drawn  from  the 
sinking  fund  for  general  treasury  purposes,  and  which  should  be 
returned  to  it  "  He  called  attention,  however,  to  the  fact  that  the 
cost  of  the  Croton  Aqueduct  would  largely  exceed  the  original 
estimates  ;  that  large  additional  issues  of  the  stock  would  there- 
fore have  to  be  made  ;  stated,  that  the  revenue  from  the  sale  of 
water  for  years  to  come  could  not  be  expected  to  "contribute 
much,  if,  indeed,  any,  more  than  sufficient  to  keep  down  the  inter- 
est of  its  cost";  doubted,  in  fact,  "whether  it  can  ever  furnish 
anything  towards  the  final  cancellation  of  the  loan!"  and  finally 
recommended  that  the  sinking  fund  be  strengthened  by  adding 
excise  and  ferry  licenses  to  its  pledged  revenues. 

1  Compt.  Rep.,  1884,  p.  4. 

'  Proceedings,  Common  Council,  Vol.  11,  p.  134. 


7 


CAUSES    WHICH    LED   TO    THE    SINKING    FUND    ORDINANCE  OF  1844. 

On  January  J,  1843,  the  city  debt  had  grown  to $14,790,424.33, 
of  which  $11,897,801.10  had  been  incurred  for  the  new  Croton 
water  system.  The  proper  method  of  paying  the  intoi-ost  on  tliis 
water  stock  became  a  subject  of  pohtical  discussion,  l^ending  the 
construction  of  the  Croton  Aqueduct,  the  interest  on  these  bonds 
had  been  paid  largely  out  of  the  proceeds  of  new  issues;  but  dur- 
ing the  last  five  months  of  1842,  such  interest,  to  the  amount  of 
$152,914.53,  had  been  paid  from  taxation.  In  that  year  the  first 
receipts  from  the  Croton  water  rents  were  forthcoming,  and  opin- 
ions differed  widely  as  to  the  disposition  which  should  be  made  of 
them.  The  Croton  Aqueduct  board  believed  that  these  water 
rents  should  be  applied  to  the  sinking  fund  for  the  redemption  of 
the  bonds.  The  comptroller  held  that  they  should  be  applied  first 
to  meet  the  current  expenses  of  the  Croton  Aqueduct  works; 
secondly,  to  the  payment  of  interest  on  the  bonds,  and  only  lastly 
to  the  redemption  of  the  stock.  He  estimated  that  under  his  plan 
the  whole  city  debt  could  easily  be  paid  off  as  it  fell  due,  while, 
under  the  method  proposed  by  the  Aqueduct  board,  accumulations 
of  the  sinking  fund  would  equal  the  whole  city  debt  twenty-two 
years  before  the  last  of  it  became  payable,  whereby,  he  claimed, 
too  great  a  burden  would  be  cast  upon  the  taxpayers  of  the  day  to 
the  unjust  advantage  of  posterity.^ 

In  1843  the  board  of  aldermen  requested  a  report  from  the 
comptroller,  the  street  commissioner  and  its  finance  committee  in 
regard  to  the  expediency  of  selling  the  real  estate  of  the  city  not  in 
use  or  required  for  public  purposes.  This  report,  which  was  ren- 
dered on  December  29,  1843,  made  the  proper  subject  of  its  inquiry 
an  excuse  for  dealing  with  a  far  wider  reaching  question — the  re 
organization  of  the  sinking  fund ;  and  incidentally  it  settled 
the  mooted  problem  of  the  disposition  to  be  made  of  the  water 
revenue. 

The  committee  began  by  reciting  that  ^^the  City  is  now  bur- 
thened  with  a  heavy  debt,  demanding  annually,  for  the  payment 
of  interest,  the  levy  of  a  large  sum  in  the  form  of  a  tax  upon  the 
property  of  our  citizens";  and  stated  that  the  means  of  reducing 
taxes  were  easily  available  by  the  sale  of  the  valuable  real  estate 
owned  by  the  corporation  which,  on  account  of  its  unimproved 

1  Compt.  Hep..  1842.  p.  121. 

^  DocumenU.  lid.  of  Aid.,  Vol.  X  ,  p.  585 


8 


condition,  yielded  nothing  in  the  form  of  revenue  to  the  city 
treasury.    The  report  continues: 

It  has,  much  of  it,  for  more  than  a  century,  been  a  direct  burthen  upon  the  taxable 
property  of  the  City,  as  corporate  property  producing,  as  before  stated,  for  that  long 
period,  little  or  no  revenue  and  paying  no  tax. 

Not  only  are  the  improvements,  generally,  such  as  tend  to  a  low  valuation,  com- 
paratively, of  this  property  in  our  tax  lists,  and  the  revenue  derived  from  it  greatly  in- 
adequate to  its  present  actual  value,  but  that  revenue  is  expensively  and  neglectfully 
collected.  Public  bodies  like  ours,  potent  and  powerful,  though  they  be  in  name  and 
prerogative,  make  but  indifferent  landlords.  They  perform  their  functions,  as  such, 
through  agents  appointed,  not  so  much  with  reference  to  their  practical  qualifications 
for  the  place  as  to  their  politics;  not  so  much  with  reference  to  their  ability  and  faith- 
fulness in  the  collection  of  money,  as  to  their  skill  and  influence  in  collecting  suffrages. 
The  result  may  be  deduced  without  any  great  forecast.  We  have  sometimes  good 
agents,  and  sometimes  very  poor  ones,  and  last  and  worst,  sometimes  very  corrupt  and 
dishonest  ones,  who  sink,  by  their  defalcations,  a  large  portion  of  the  revenue,  ot  which 
the  collection  is  entrusted  to  them. 

To  avoid  the  necessity  of  these  agencies  to  collect  the  value  of  that  which  produces 
an  inadequate  revenue,  at  best,  into  the  fund  to  which  it  stands  pledged,  to  apply  it 
there  to  the  final  liquidation  of  the  principal  and  interest  of  the  debt  which  it  has  been 
devoted  to  secure,  seems  a  primary  object  to  be  att. lined;  and  this  object,  your  Com- 
mittee think  will  be  most  successfully  accomplished  by  providing  for  the  sale  and  dis- 
position of  the  improved  real  estate  of  the  city,  in  the  mode  suggested  by  the  Ordi- 
nance. 

******** 

Existing  Ordinances  provide  onlyjfor  the  administration  of  the  Fund  as  it  comes 
into  the  Commissioners'  hands  in  cash.  The  proposed  Ordinance  in  addition  to  this,  is 
intended  to  establish  a  permanent  policy  in  the  management  and  sale  of  the  uncon- 
verted property  of  the  City,  pledged  to  the  Sinking  Fund. 

Tha  objects  to  which  this  Fund  ought  to  be  devoted  are  two-fold;  one  for  the 
liquidation  of  ihQ  principal  of  the  City  debt,  and  the  other  the  payment  of  the  interest 
as  it  accrues. 

This  has  already  been  legislated  upon  by  the  State  Government.  It  is  enacted 
that  the  revenues  assigned  by  the  Corporation  for  the  extinguishment  of  the  debt,  be 
permanently  pledged  for  that  purpose.  The  Ordinances  of  the  Corporation  fully 
respond  to  this.  It  has  likewise  been  enacted  that  all  other  revenues  of  the  Corpora- 
tion, be  pledged  to  the  payment  of  the  interest  thereon;  and  in  the  same  law,  the  State 
pledge  themselves  to  pass  all  other  necessary  laws  to  levy  a  proper  tax,  in  case  these 
revenues  should  at  any  time  prove  insuflicient. 

These  revenues  were  sufficient,  until  the  creation  of  the  Water  debt,  and  thereupon, 
the  legislature,  in  conformity  with  its  pledge,  passed  a  permanent  law  for  the  levying 
of  this  deficiency  annually. 

The  Corporation,  although  it  has  always  paid  the  interest,  has  never  passed,  in  the 
form  of  an  ordinance,  a  provision  in  conformity  with  the  State  pledge;  and  this  is  pro- 
posed in  the  Ordinance  now  submitted  by  your  Committee. 

THE   SINKING  FUND  ORDINANCE  OF  1844. 

By  this  ordinance  (which  was  approved  by  the  mayor  on  Febru- 
ary 22,  1S44),  the  pledges  of  revenue  for  the  redemption  of  the  debt 


9 


were  left  practically  uachanged,  although  a  more  complete  and 
detailed  method  was  provided  for  the  speedy  sale  of  the  city's 
lands;  but  nearly  all  the  remaining  revenues  of  the  city/  including 
water  rents,  were  pledged  to  a  separate  sinking  fund,  the  complete 
title  of  which  was  "  The  Sinking  Fund  of  The  City  of  New  York 
for  the  Payment  of  the  Interest  Accruing  and  to  Accrue  upon  the 
Stocks  of  The  City  of  New  York  until  the  Same  be  fully  and 
finally  Redeemed."  '  The  duties  and  powers  of  the  commissioners 
of  the  sinking  fund  were  prescribed  with  considerable  detail  and 
provision  was  made  for  the  collection  by  taxation  of  the  amount 
by  which  the  revenues  of  the  "  Interest  Fund  "  might  fall  short  of 
the  annual  interest  charges  on  city  stock. 

The  plan  of  providing  elaborate  sinking  fund  machinery  for 
meeting  annually  recurring  interest  charges  seems  rather  remark- 
able. In  the  ordinary  conception  of  a  sinking  fund  there  inhere 
two  fundamental  ideas:  (1)  debt  redemption  by  anticipated  pay- 
ments, and  (2)  accumulation  by  the  accretion  of  compound  interest. 
Anticipated  payment  of  interest  on  public  securities  is  unknown 
except  within  such  narrow  limits  as  to  be  useless  for  purposes  of 
amortization.  The  idea  of  accumulation  seems  equally  inapplic- 
able. It  is  obvious  that  so  far  as  interest  on  debt  is  concerned,  its 
periods  of  payment  will  substantially  be  of  as  frequent  occurrence 
as  the  availability  of  the  sinking  fund  resources.  If,  therefore,  the 
amount  of  the  available  income  equals  or  is  less  than  the  annual 
interest  charge,  there  can  be  no  accumulation;  for  the  income  will 
be  no  sooner  received  than  it  must  be  paid  out.  In  such  an  event 
there  can  be  no  useful  purpose  in  creating  a  *'*  fund  *'  for  the  per- 
formance of  so  simple  a  function.  If,  on  the  other  hand,  the 
amount  of  annual  revenues  exceed  the  amount  of  interest  charged 
thereon,  accumnlation  will  undoubtedly  ensue,  but  with  the  sole 
result  of  locking  up  money  of  the  taxpayers  for  some  problemati- 
cal end  which,  at  least,  cannot  be  said  to  be  in  sight. 

It  has  not  been  uncommon,  in  the  creation  of  sinking  funds,  to 
charge  them  simultaneously  with  the  payment  of  accruing  inter- 
est, as  well  as  with  the  duty  of  redeeming  the  principal  of  funded 

Un  ISoQ  it  was  found  that  the  sinking  fund  ordinance  of  1844  haci  not,  in  its 
enumeration  of  revenues  pled^^ed  thereio,  exhausted  all  the  revenues  of  the  city  and 
these  unpledged  revenues  (the  sources  of  whicli  hhd  not  exist' d  in  1844)  were  creclited 
to  an  account  crejited  on  tne  bo  -ks  of  the  corp«iration,  entitled  the  General  Fund  (sub^ 
sequenily  known  as  the  Qen(  ral  Fund  for  ihe  Reduction  of  Taxation). 

2  For  the  sake  of  brevity  these  two  funds  will  generally  be  referred  to  iiereafter  aji 
the;  "Uedeniption  Fund"  and  the  "  Interest  Fund." 


10 


indebtedness;  but  where  this  double  duty  operates  upon  a  single 
fund,  no  particular  inconvenience  can  result,  since  whatever  is  left 
of  the  annual  revenues,  after  the  payment  of  the  interest,  can  be 
applied  automatically  to  purposes  of  redemption  or  absorption  of 
new  issues.  But  in  the  sinking  fund  ordinance  of  1844  two  dis- 
tinct funds  were  created,  wholly  independent  of  one  another,  and 
consequently  affording  neither  aqueduct  nor  storage  reservoir  for 
the  overflowing  revenue  of  the  sinking  fund  for  the  payment  of 
interest.  It  is  true  that  at  the  time  the  ordinance  of  1844  was 
passed  there  was  no  true  conception  of  what  the  future  receipts 
from  water  rents  would  be.  Even  Comptroller  Douw  D.  William- 
son, in  his  argument  in  1843,  designed  to  emphasize  the  probable 
adequateness  of  these  receipts,  only  estimated  that  for  the  thirty- 
eight  years  from  1843  to  1880  inclusive,  they  would  amount  to 
$14,475,000.  In  fact,  they  amounted,  during  this  period,  to 
$34,010,699.46.  The  financiers  of  that  time  were  more  interested 
in  the  question  of  supplying  from  taxation  the  deficiency  in  the 
annual  interest  charges  left  after  the  application  thereto  of  water 
revenue  than  in  planning  for  the  disposition  of  what  may  have 
then  seemed  a  very  improbable  surplus  in  those  revenues.  Owing 
to  the  rapidly  increasing  revenues  from  water  rents,  however,  the 
necessity  for  resorting  to  taxation  to  supplement  the  resources  of 
the  interest  fund  ceased  with  the  year  1850,  as  exhibited  by  the 
following  table  : 

REVENUES  AND  DISBURSEMENTS  OF  THE  "INTEREST  FUND"  FROM 

1844  TO  1851  INCLUSIVE. 


Croton    Watkk  Dock  and  Slip 
Rbnt.  Rent. 


$108  243  02 
157.791.66 
193,914.70 
221,635.10 
255,053.09 
278,811.72 
458,951.87 
458,789  78 


$34,897.00 
68,424.38 
71,876.47 
75,866.39 
92,785.12 
100,208.13 
108,483.98 
97  706.41 


Ferry  Rent. 

Tavkrn  *  Excise 

LiCBNSKB.  1 

1 

Taxation. 

Total 
Revenues.  1 

Ivtbrert 

Charcb. 

$31,705.90 
46,786  20 
49,788.10 
50.720.00 
49,750  00 
50,127.04 
50,982.50 
53,270.00 

$34.987.10,$302,517.15 
35,079.89  375,000.00 
36,563.19  300.000  00 
41,565.55  300,000.00 
47,406.92  276,000.00 
48,746  291  250,000.00 
53,493.05  186,689.00 
60,221.631  

$570,525.23 
770,410  50 
739.410.88 
771,048.86 
799,204.15 
800,678.25 
943,842.76 
751,154.24 

$529,151.43 
754,672  59 
761,099.79 
765.417.25 
771,348.45 
779.089.96 
770,764.69' 
765,733.82 

1  The  sources  of  revenue  of  the  Interest  Fund  during  this  period  were,  in  addition  to  those 
sp*»ciflcally  enunaerated  nbove:  (1)  Common  r..and  Rent,  (2)Ground  ftent,  (3)  House  Rent,  (0  Water 
Lot  R-)nt,  (5)  Interest  on  bond  and  morterage  (6)  Tnrer  st  erenprally,  (*'')  Mayoralty  Fees.  (8)  Court  Fees 
and  Kines,  (9)  Fines  and  Penalties,  (10)  Police,  (II)  Sewer  Permits,  (12)  Commutation  of  Alien  Passen- 
gers, (13>  Sales  of  Personal  Estate. 

8  The  balance  (surplus)  in  bank  on  December  31, 18!0,  was  $264,046.52. 

The  sinking  fund  ordinance  of  1844  was  in  its  inception  entirely 
the  creation  of  the  local  authorities.    In  the  following  year,  how- 


11 


ever,  its  provisions  were  re- affirmed  and  embodied  in  the  law  of 
the  state  by  the  legislature.  A  memorial  was  presented  to  that 
body  by  the  common  council,  with  a  bill  for  borrowing  $5^)0,000 
for  the  Croton  Aqueduct,  the  fifth  section  of  which  declared  that 
the  ordinance  of  18-14  should  not  be  altered  except  to  add  to  the 

fund  for  the  redem[)tion  of  the  debt  "  without  the  "  consent  of 
the  legislature  first  had  and  obtained,"  and  that  the  said  ordinance 
should  remain  in  ^'  full  force  until  the  whole  of  the  debt  created 
for  the  introduction  of  the  Croton  water  into  the  city  of  New  York 
shall  be  fully  redeemed."  ^ 

In  lS5Gthe  receipts  of  the  interest  fund"  were  SI,  136,852.05, 
w^hich,  with  the  cash  surplus  on  January  1st  of  that  year,  aggre- 
gated $2,-i06, 020.05,  against  which  were  charged  interest  payments 
of  «»nly  $760,088.81.  This  tempting  surplus  seems  to  have  been 
partly  disposed  of  by  the  following  method,  which  was  evidently 
dicTyated  by  the  temporary  needs  of  the  city  treasury.  The  cash 
means  of  the  "  redemption  fund"  for  the  year  1856  were  $1,434,- 
085.19.  Its  redemptions  of  and  new  investments  in  funded  debt 
amounted  only  to  §1,065,459;  but  it  had  also  invested  $700,000  in 
revenue  bonds  of  the  city  issued  for  current  expenses  in  anticipa- 
tion of  the  collection  of  taxes.  This  left  a  deficiency  which  w^as 
made  good  by  the  simple  method  of  '^advancing"  $332,131.72 
from  the  interest  fund."  It  was  proving  inconvenient  to  pre- 
serve the  unnatural  separation  of  the  two  funds.    In  1857  this 

advance"  had  increased  to  $386,325.60.  On  December  31,  1858, 
the  interest  fund  had  accumulated  a  surplus  over  and  above  all 
existing  charges  against  the  same  of  $2,579,534.12,  and  the  ever 
increasing  embarassment  of  this  anomalous  feature  of  municipal 
finance  led,  in  the  following  year,  to  the  passage  of  Chapter  406 
of  the  Law^s  of  1859,  wdiich  authorized  the  transfer  of  this  surplus 
to  the  redercption  fund.o 

» Ch.  225,  L.  1845. 

•Tbe  preamble  of  this  act  read  as  follows: 
WnERKAB,  the  revenue  set  apart  and  mentioned  in  title  two  of  the  ordinance  of 
the  mayor,  aldermen  and  commonalty  of  the  city  of  New  York,  entitled  '  An  ordi- 
nance providing  for  the  redemption  of  the  city  debt,  and  the  payment  of  the  interest 
thereon,'  passed  February  twenty-second,  eighteen  hundred  and  forty-four,  being  the 
revenues  pledged  and  appropriated  to  the  payment  of  the  interest  upon  the  said  city 
debt,  have  accumulated  after  the  payment  of  all  interest  provided  for  in  said  ordi- 
nance to  be  paid  on  said  debt  and  chargeable  to  said  sinking  fund  for  the  payment  of 
the  interest  on  said  debt,  so  that  on  the  first  day  of  January,  eighteen  hundred  and  fifty- 


12 


This  amount  was  transferred  as  of  January  1st,  1859.  During 
the  year  1859,  $542,501.02  was  transferred;  in  1860,  $776,674.13;  and 
in  1861,  $68b,495.75— making  a  total  of  $4,582,205.02. 

APPLICATION  OF  SURPLUS  REVENUES  TO  THE  REDUCTION  OF 

TAXATION. 

This  practical  consolidation  of  the  redemption  and  interest 
funds  was  not  permitted  long  to  continue.  The  unequal  and 
therefore  unfair  adjustment  of  the  debt  burden  as  between 
present  and  future  taxpayers,  which  resulted  from  the  unneces- 
sary segregation  of  nearly  all  the  city's  revenues,  could  not  long 
escape  the  attention  of  the  city's  financial  officers,  naturally  solic- 
itous as  they  were  to  reduce  the  weight  of  taxation.  The  disparity 
between  the  redemption  requirements  of  the  city  debt  and  the 
means  set  apart  to  effect  that  redemption  had  been  accentuated  by 
the  action  of  the  legislature  in  ignoring  the  interest  fund  in 
numerous  acts  passed  subsequent  to  1844  which  provided  that  the 
interest  on  bonds  thereby  authorized  to  be  issued  should  be  paid 
from  taxation.^ 

In  1862,  Comptroller  Robert  T.  Haws  in  a  communication  to  the 
common  council^  recommended  that  legislation  should  be  secured 
which  would  permit  the  surplus  revenues  of  the  interest  fund  to  be 
appHed  ta  the  reduction  of  taxation.  After  calling  attention  to 
the  fact  that  the  interest  fund  was  charged  with  the  payment  of 
interest  only  upon  the  Water  Stock,  the  Fire  Indemnity  Stock  and 
the  Building  Loans  Nos.  3  and  4,  and  that  the  interest  on  the 
greater  portion  of  the  then  existing  debt  was  by  law  payable  from 
taxation,  he  stated: 

Instead  of  appWii'g  such  surplus  to  the  unnecessary  augmeiitation  of  the  Sinking 

nine,  they  amounted  to  the  aggregate  sum  of  two  millions  five  hundred  and  seventy-nine 
thousand  five  hundred  and  thirty-four  dollais  and  twelve  cents; 

**  And  whereas,  there  is  no  object  to  which  said  sum  and  the  accumulations  which 
may  hereafter  arise  from  said  revenues  can  be  applied,  as  no  power  exists  by  which  the 
commissioners  of  the  sinking  fund  mentioned  in  said  ordinance,  can  invest  g.aid  moneys 
permanently; 

"And  whereas,  it  is  desirable  that  said  surplus  and  the  accumulations  which  may 
hereafter  arise  from  said  revenues,  after  the  payment  of  all  interest  on  said  debt,  should 
be  transferred  to  the  sinking  fund  for  the  redemption  of  the  city  debt  provided  for  in 
said  ordinance;  therefore,"  etc.,  etc. 

*  Oq  January  1.  1863,  bonds  were  outstanding  to  the  amount  of  $3,788,000,  the 
principal  of  which  had  also  been  made  payable  from  taxation  by  the  laws  authorizing 
their  issue. 

^  Documents,  1862,  No.  3. 


13 


Fund  for  the  Redemption  of  the  Principal  of  the  Debt,  as  has  been  done  during  tl)e  last 
few  years,  it  is  proposed  to  appropriate  the  amount  to  the  payment  of  interest  and  the 
general  expenses  of  the  corporation,  which  by  existing  laws  are  provided  for  wholly  by 
taxation. 

He  submitted  an  estimate  showing  that  the  redemption  fund 
would,  without  the  assistance  of  the  surphis  revenues  of  the 
interest  fund,  be  far  more  than  sufficient  to  extinguish  as  it 
matured  the  entire  existing  debt  payable  therefrom. 

As  a  consequence  of  these  representations,  the  legishiture  by- 
Chapter  163  of  the  Laws  of  1862,  authorized  the  transfer  of  the 
surplus  revenue  of  the  interest  fund  to  the  general  fund  ^*to  be 
applied  to  the  diminution  of  the  taxes  of  said  city." 

In  pursuance  of  this  act  there  was  transferred  to  the  general 
fund  during  the  seventeen  years  from  1862  to  1878,  inclusive,  the 
sum  of  §17,290,713. 

THE  BONDED  INDEBTEDNESS  ACT  OF  1878. 

During  these  seventeen  years,  there  was  an  immense  growth 
in  the  city's  debt.  Among  the  chief  purposes  for  which  bonds  w^ere 
issued  during  this  period  may  be  mentioned  the  improvement  of 
Central  Park,  the  war  expenditures  for  bounties,  etc.,  ($14,597,3n0), 
the  wasteful  undertakings  of  the  Tweed  ring  and  the  refunding  of 
floating  indebtedness  which  necessarily  followed  its  overthrow. 

The  funded  debt  increased  from  $25,738,012  in  1862  to  8121,- 
440,133  in  1878.  Nearly  all  these  new  bond  issues  had  been  made 
payable,  principal  and  interest,  from  taxation,  so  that  on  Janu- 
ary 1,  1878,  the  state  of  the  city  debt  and  the  sinking  funds  was  as 


follows: 

Funded  debt  payable  from  taxation,   $09,030,089.68 

"     sinking  fund,   21,510,043.47 

Total  Funded  Debt,   $121,440,133.15 

Deduct  securities  held  by  sinking  fund,   31,080,007.54 

Net  Funded  Debt,   $90,360,125.61 


This  situation  naturally  forced  the  serious  attention  of  the 
local  authorities.  The  sinking  fund  held  securities  amounting  to 
nearly  ten  millions  of  dollars  more  than  the  entire  debt  which  it 
was  pledged  to  redeem.  Nearly  four- fifths  of  the  entire  city  debt 
was  payable  from  taxation,  and  the  redemption  dates  of  that  debt 
had  been  so  unevenly  distributed  that  abnormal  amounts  would 


14 


have  to  be  inserted  in  the  budgets  of  certain  years  unless  other 
provision  should  be  made  for  its  payment.  The  average  revenues 
of  the  sinking  fund  for  the  preceding  five  years  had  exceeded  three 
millions  of  dollars,  and  these  revenues  were  steadily  increasing. 
The  last  bonds  payable  from  the  sinking  fund  did  not  mature  until 
1917  at  which  time  the  surplus  in  the  fund,  if  allowed  to  continue 
to  accumulate  uselessly,  would  reach  Brobdingnagian  proportions. 

Comptroller  Kelly  on  January  9,  18T8,  submitted  to  the  mayor 
a  draft  of  a  bill  to  be  presented  to  the  legislature  together  with  a 
memorial  explaining  its  provisions.^  Comptroller  Kelly's  scheme 
contemplated  the  following  legislation: 

(1)  The  sinking  fund  for  the  redemption  of  the  city  debt  was 
to  be  continued  and  after  providing  for  the  payment  of  the  bonds 
and  stocks  of  the  city  payable  therefrom  as  provided  by  law, 
should  form  a  fund  for  the  payment  of  the  bonds  and  stocks  then 
outstanding  which  had  been  madp  payable  from  taxation. 

(2)  All  moneys  and  revenues  heretofore  pledged  to  the  sink- 
ing fund  to  continue  to  be  so  pledged  until  all  of  said  bonds  and 
stocks  of  the  said  city  shall  be  fully  and  finally  redeemed." 

(3)  The  surplus  revenues  of  the  interest  fund  were  to  be 
definitely  pledged  to  the  redemption  fund — in  effect  there  being  a 
new  consolidation  of  these  two  funds. 

(4)  In  consideration  of  the  redemption  by  the  sinking  fund  of 
outstanding  assessment  bonds,  the  proceeds  of  collections  of 
assessments  for  local  improvements  completed  or  under  contract 
at  the  time  of  the  passage  of  the  act  were  to  be  likewise  pledged 
to  the  sinking  fund. 

(5)  An  amount  not  exceeding  one  million  dollars  a  year  was 
to  be  raised  by  taxation  for  the  sinking  fund  whenever  the  com- 
missioners of  the  sinking  fund  should  certify  to  the  board  of  esti- 
mate and  apportionment  that  the  accumulations  of  the  sinking 
fund  would  not  be  sufficient  to  meet  the  payment  of  bonds  falling 
due  in  the  next  following  calendar  year,  and  if  this  provision 
should  still  be  found  insufficient  for  that  purpose,  authority  was 
to  be  given  to  issue  refunding  bonds  payable  within  twelve 
years. 

(6)  For  the  payment  of  all  bonds  and  stocks  to  be  hereafter 
issued  pursuant  to  the  provisions  of  any  statute  authorizing  the 
same  and  which  by  the  provisions  of  such  statute  are  payable 


1  Documents,  Bd.  of  Aid.,  1878.  No.  2. 


15 


from  taxation,"  regular  amortizing  installments  were  to  be  in- 
cluded in  the  annual  tax  levies. 

(7)  A  new  provision  of  law  was  recommended,  the  subse- 
quent effects  of  which  have  been  so  important  that  it  is  quoted  in 
full  as  follows: 

Between  the  city  and  its  creditors,  holders  of  its  bonds  and  stocks  as  aftMCBaid, 
there  shall  be  and  there  is  hereby  declared  to  be  a  (contract  that  the  funds  and  revenues 
of  the  city  and  the  funds  to  be  collected  from  assespmeuts  as  aforcf^aid,  by  this  statute 
pledged  to  the  Sinking  Fund  for  the  Redemption  of  the  City  Debt,  shall  be  accumulated 
and  applied  only  to  the  purposes  of  said  binking  Fund  as  lierein  provided,  until  all  of 
said  debt  is  fully  redeemed  and  paid. 

The  form  and  substance  of  Comptroller  Kelly's  proposed 
statute  were  undoubtedly  influenced  by  the  political  conditions  of 
the  time.  The  factional  antagonisms  of  the  day  were  such  that 
the  state  legislature  and  executive  were  certain  to  look  with  sus- 
picion and  distrust  upon  any  recommendation  emanating  from  the 
local  authorities.  Doubtless  with  a  view  to  meeting  all  possible 
objections  of  a  technical  character,  the  Comptroller's  bill  was 
drawn  in  a  manner  which  disclosed  an  ur fortunate  timidity  of 
purpose.  In  the  effort  to  appear  to  guard  with  zealous  fidelity  the 
interests  of  the  bondholders  entitled  to  the  security  of  the  pledged 
revenues  of  the  sinking  fund,  and  to  create  additional  revenues 
for  the  benefit  of  purchasers  of  bonds  to  be  thereafter  issued,  this 
bill  was  padded  with  pledges  for  the  future  which  were  not  only 
unnecessary  but  were  destined  to  work  great  inconvenience  to  the 
financial  administration  of  the  city.  Especially  was  this  true  of 
the  "contractual  pledge"  above  quoted.  Even  this  bill,  however, 
when  passed  by  the  legislature  was  vetoed  by  Governor  Robinson 
who  claimed  that  the  rights  of  holders  of  bonds  payable  f  tom  the 
sinking  fund  were  violated,  objected  to  the  refunding  provisions, 
and  recommended  that  the  $1,000,000  appropriation  in  the  budget 
should  be  changed  from  a  maximum  to  a  minimum  amount.  The 
bill,  having  been  modified  so  as  partly  to  meet  his  objections,  finally 
received  his  signature  and  became  Chapter  3S3  of  the  Laws  of  1878. 
This  act  which  is  commonly  referred  to  as  the  "  Bonded  Indebted- 
ness Act,"  committed  the  city  to  an  indefinite  bondage  to  the 
"pledged  revenue"  fetich  from  which  it  has  never  been  able 
wholly  to  free  itself. 

In  1878  the  time  was  ripe  for  a  reorganization  of  the  sinking 
fund  system  upon  rational  and  scientific  lines.  It  is  obvious  that 
at  this  time  no  bondholder  could  legitimately  demand  greater 


16 


security  for  his  debt  than  a  sinking  f and  which  possessed  assets 
nearly  fifty  per  cent  in  excess  of  the  entire  debt  payable  therefrom. 
Wise  statesmanship  would  have  demanded,  and  good  faith  would 
have  warranted,  the  diverting  of  all  subsequent  revenues  of  the  sink- 
ing fund  to  the  general  fund  for  the  reduction  of  taxation  (partially 
accomplished  during  a  period  of  seventeen  years  under  the  pro- 
visions of  Chapter  163  of  the  Laws  of  1862),  and  establishing  new 
sinking  fund  regulations  under  which  there  should  be  raised  each 
year  by  taxation  amortizing  installments  exactly  sufficient  with 
their  accumulations  of  compound  interest  to  redeem  all  new  debt 
at  its  maturity.^  Snch  a  departure  would  have  proved  most  bene- 
ficial to  the  future  management  of  the  city's  finances.  If,  how- 
ever, uni*easoning  popular  belief  in  the  pledged  revenue  "  system 
seemed  to  demand  its  continued  existence,  there  was  no  financial 
necessity  for  superimposing  upon  this  system  new  provisions  for 
additional  revenue  from  taxation.  Tlie  revenues  of  the  sinking 
fund  (amounting  then  to  about  three  millions  annually)  were  for 
practical  purposes  entirely  surplus";  and  this  surplus  might 
properly  have  been  charged  (as  it  was  eleven  years  later  by  the 
act  of  1889),  with  the  redemption  of  subsequently  issued  funded 
debt.  But  in  1878,  as  in  earlier  and  later  instances  of  legislative 
tinkering  with  the  sinking  funds,  it  was  only  the  pressing  financial 
inconveniences  of  the  hour  which  controlled.  The  future  might 
care  for  itself.  The  problem  then  seemed  to  revolve  about  these 
questions  only:  First,  how  to  redeem  otherwise  than  from  taxa- 
tion four-fifths  of  the  public  debt  which,  as  originally  issued,  had 
been  made  thus  redeemable;  and  secondly,  how  to  dispose  of  an 
additional  burden  of  $21,320,500  of  assessment  bonds  for  the 
redemption  of  which  it  was  known  that  the  revenues  applicable 
thereto  wo  aid  be  greatly  deficient.^     These  ends  were  accom- 

^  The  writer  is  neither  unaware  of  the  argument  which  might  be  drawn  from  the 
provisions  of  Chapter  225  of  the  Laws  of  1845,  nor  forgetful  of  the  reasoning  of  Cor- 
poration Counsel  Lacombe  in  his  Sinking  Fund  opinion  of  November  28,  1884;  but  the 
theoretical  benefits  to  be  obtained  in  1878  from  a  close,  technical  construction  of  sinking 
fund  law  were  of  such  extreme  tenuity,  and  the  practical  advantages  of  a  common-sense 
construction  so  manifest,  that  it  seems  scarcely  conceivable  that  adverse  criticism  could 
then  have  attached  to  any  serious  effort  to  reorganize  the  sinking  fund  system  on  a 
scientific  basis,  Tlie  situation  was  entirely  different  from  that  presented  by  the  passage 
of  the  Act  of  1889. 

Professor  Durand  in  his  Finances  of  the  City  of  New  York  (p.  310),  holds  similar 
views  to  those  here  expressed. 

^  Most  of  this  large  indebtedness  had  been  incurred  for  street  improvements  begun 
during  the  Tweed  regime,  assessments  for  which  had  been  frequently  vacated  or  remit- 
ted by  the  courts  owing  to  frauds  and  irregularities  of  various  kinds. 


17 


plished,  hut  in  their  accomplishment  a  sinking  fund  system  was 
created  so  burdensome  in  its  nature  that  it  is  not  astonishing  that 
only  eleven  years  Inter  further  legislative  interference  was  invoked 
and  obtained  in  spite  of  the    contractual  pledge"  of  1878.^ 

By  the  change  in  the  disposition  of  the  surplus  revenue  of  the 
interest  fund — e.,  from  the  general  fund  for  the  reduction  of  taxa- 

^  1  his  period  was  an  imporlaut  one  iu  the  history  of  the  city  debt.  Ou  Novem- 
ber 4,  1«84,  the  constitutional  amendment  was  adopted  which  prohibited  cities  of  over 
one  hundred  thousand  inhabitants  from  becoming  indebted  in  excess  of  ten  per  centum 
of  the  assessed  valuation  of  real  estate,  with  an  exception  as  follows:  "Nor  sliall  this 
section  be  construed  to  prevent  the  issue  of  bonds  to  provide  for  the  supply  of  waler, 
but  the  term  of  the  bonds  issued  to  provide  for  the  supply  of  water  shall  not  exceed 
twenty  years,  and  a  sinking  fund  shall  be  created  on  the  issuing  of  said  bonds  for  their 
redemption,  by  raising  annually  a  sum  which  will  produce  an  amount  equal  to  the  sum 
of  the  principal  and  interest  of  said  bonds  at  their  maturity."  Ten  per  cent  of  the 
assessed  valuation  of  the  city  on  January  1,  1885  was  $111,976,1'"39.70.  The  total  bonded 
debt,  exclusive  of  revenue  bonds,  was  $125,810,579.33,  of  which  $35,479,579.33  was  held 
by  the  sinking  fund.  If,  as  Corporation  Counsel  Lacombe  had  held,  the  constitutional 
restriction  ran  against  the  gross  debt,  the  citj''  would  have  exceeded  this  limitation.  An 
attempt  to  issue  $3,000,000  bonds  for  dock  purposes  was  at  first  successfully  enjoined 
by  certain  taxpayers  and  bondholders,  and  for  a  while  new  public  improvements  were 
suspended,  but  the  Court  of  Appeals  finally  decided  (Bank  for  Savings  v.  Grace,  102 
N.  Y.  313),  reversing  the  courts  below,  that  stock  purchased  by  the  sinking  fund  was 
"  not  a  debt  against  the  city  within  the  meaning  of  the  constitutional  prohibition." 

Prior  to  1889  the  constitutional  provision  above  quoted  relative  to  the  creation  of  a 
sinking  fund  for  water  bonds  required  no  particular  attention,  since,  under  the  pro- 
visions of  the  Bonded  Indebtedness  Act  amortizing  installments  were  being  raised  for 
the  redemption  of  all  bonds  issued  since  1878.  The  view  seems  to  have  been  taken, 
however  (see  Minuteis  Com.  of  the  S.  F.,  Jan.  6,  1885),  that  this  provision  required  the 
creation  of  such  a  distinct  fund,  regardless  of  the  question,  whether  the  constitutional 
limit  of  indebtedness  had  been  exceeded  by  the  city,  and  on  January  16,  1889,  the  com- 
missioners of  the  sinking  fund  adopted  the  following  resolution : 

''Resolved,  that  the  Comptroller  be  and  is  hereby  authorized  and  directed  to 
separau*  the  amounts  of  annual  installments  raised  by  tux  for  the  payment  at  maturity, 
of  bou^is  issued  for  the  supply  i>f  water,  pursuant  to  section  11,  ot  Article  Vlll,  of  the 
State  Constitution,  to  ba  kept  as  a  distinct  fund  from  the  general  account,  and  tle.siguate 
the  securities  iu  which  the  moneys  are  invested,  to  be  reported  from  time  to  time,  to 
this  Board." 

Thereafter  these  instaMm^nts  with  their  accumulations  of  interest  anil  the  stocks 
in  which  they  were  invested  were  segregated  into  a  separate  sinking  fund  known  as 
"Sinking  Fund  for  the  Redemption  of  the  City  Debt,  No.  2."  Chapter  178  of  the  Laws 
of  1889  (see  jyoat)  was  drawn  under  a  similar  misapprehension,  but  three  years  later  the 
Court  of  Appeals  decided  (City  of  Rochester  v.  Quiutard,  136  N.  Y.  221)  that  this  pro- 
vision had  no  application  to  a  city  whose  inilebleduess  did  not  exceed  the  constitutional 
limit.  Undoubtedly,  had  this  been  understood  to  be  the  law  in  1889,  the  amendment  to 
the  Bonded  Indebtedness  Act  passed  in  that  year  would  have  provided  that  the  install- 
ments for  water  bonds  might  be  provided  from  the  surplus  levenut  s  of  the  redemption 
fund  instead  of  from  taxation. 


18 


tion  to  the  redemption  fund — there  was  added  to  the  accumulation 
of  the  sinking  fund  during  the  ten  years,  1879-1888,  inclusive,  the 
sum  of  $21,650,000 — the  effect  of  which  was  the  same  as  though 
this  amount  had  been  raised  directly  by  taxation.  In  1879,  the 
minimum"  appropriation  of  $l,OuO,000  provided  by  the  Bonded 
Indebtedness  Act  was  included  in  the  tax  levy.  ^  In  the  next  nine 
years  the  sinking  fund  installments  raised  by  taxation  under  the 
provisions  of  the  eighth  section  of  the  act,  amounted  to  $4,880,- 
696.69. 

Coincidently  the  ordinary  revenues  of  the  redemption  fund, 
especially  from  dock  rents  continued  to  increase.  The  annual 
revenue,  which  in  1877  had  been  $2,909,066.14,  grew  by  leaps  and 
bounds  until  in  1888  it  amounted  to  $8,903,284.80. 

As  these  revenues  exceeded  the  average  annual  issues  of  bonds 
during  this  period ,  the  net  funded  debt  (including  assessment  bonds 
and  excluding  revenue  bonds),  decreased  from  $111,649,317.91  to 
$88,120,405.34.  This  was  too  rapid  a  pace  in  debt  extinction  for 
the  local  authorities  of  the  time. 

The  budget  for  the  year  lb78  had  been  $30,079,077.12;  in  1888 
it  had  grown  to  $37,051,053.93.  It  was  generally  agreed  that  a 
reduction  of  the  burdens  of  taxation  would  be  popular  and  desir- 
able— e^^en  necessary.  Debt  amortization  was  proceeding  at  a  rate 
which  was  not  fair  to  the  present  generation.  The  experience  of 
1862  was  about  to  be  repeated,  with  this  difference,  however:  that, 
whereas  at  the  earlier  date  the  diversion  of  the  surplus  revenues 
of  the  interest  fund  had  awakened  little  if  any  protest,  an  attempt 
at  this  time  to  devote  any  of  the  revenues  of  the  sinking  fund  to 
the  reduction  of  taxation  was  bound  to  be  open  to  the  charge  of 
a  breach  of  faith  founded  on  the  solemn  statutory  pledge  contained 

1  The  act  as  finally  passed  required  the  board  of  estimate  and  apportionment  to 
insert  in  the  budget  such  an  amount  as  the  commissioners  of  the  sinking  fund  should 
certify  to  be  necessary  to  meet  the  payment  of  any  bonds  or  stocks  falling  due  in  the 
next  following  calendar  year,  by  reason  of  an  insufBciency  in  the  accumulations  to  the 
sinking  fund;  ''proi?ided,  however,  that  the  amount  so  to  be  raised  by  taxation  and 
paid  into  the  Sinking  Fund,  as  in  this  section  provided,  shall  not  in  any  one  year  be 
less  than  the  sum  of  one  million  dollars  nor  more  than  two  million  dollars."  The  sum 
of  one  million  dollars  was  inserted  in  the  tax  levy  for  the  year  1879  in  pursuance  of  the 
provisions  of  this  section  but  tbi-i  item  never  afterwards  reappeared  in  the  budget. 
Tbe  obviously  excessive  resources  of  the  sinkmgfund  led  to  a  construction  of  the  some- 
what ambiguous  phraseology  of  the  act  in  regard  to  this  appropriation,  under  which  it 
WHS  held  to  be  required  only  when  actually  ne«ded  for  the  redemption  of  bonds  matur- 
ing in  the  next  calendar  year. 


1'.) 


in  the  act  of  1S78,  declaring  that  a  contract  existed  between  the  city 
and  its  creditors  that  all  the  revenues  of  the  sinking  fund  should  be 
applied  only  to  its  purposes  until  the  entire  debt  payable  therefrom 
should  be  finally  redeemed  and  paid.  What  was  really  done  was, 
in  fact,  a  clear  repudiation  of  this  pledge.  The  method  pursued 
was  rather  involved,  but  may  be  briefly  summarized  as  follows: 

(1 )  The  annual  installments  required  by  the  Bonded  Indebted- 
ness Act  of  1S7S  to  be  raised  for  the  redemption  of  bonds  issued 
after  June  3,  1878,  were  no  longer  to  be  provided  for  by  taxation, 
but  might  be  "  set  apart  out  of  the  surplus  income,  revenues  and 
accumulations  of  the  sinking  fund  for  the  redemption  of  the  city 
debt  after  fully  providing  for  the  payment  of  the  stocks  and  bonds 
which  had  been  made  preferred  claims  or  "liens"  of  said  fund/ 
Recourse  w^as  to  be  had  to  taxation  only  in  the  event  of  these 
surplus  revenues  becoming  insufficient.  This  provision  did  not 
affect  the  annual  installments  raised  by  taxation  for  bonds  issued 
for  water  purposes  under  the  supposed  requirements  of  the  consti- 
tution, but  its  immediate  effect,  was,  nevertheless,  to  reduce  taxa- 
tion in  the  sum  of  $975,769.02. 

(2)  The  sinking  fund  for  the  payment  of  interest  on  the  city 
debt  was  charged  with  the  new  duty  of  paying  ''interest  on  bonds 
and  stocks  of  said  city  purchased  and  held  and  to  be  purchased  and 
held  for  investment  by  the  commissioners  of  the  sinking  fund." 
The  amount  of  such  interest  on  January  1,  1889,  was  $1,617,915.54. 

^  Under  the  Bonded  Indebtedness  Act  the  "  liens  "  on  the  sinking  fund  were  in 
the  order  of  their  priority,  as  follows: 

1.  Bonds  payable  from  the  sinking  fund  under  the  ordinance  of  1844,  and  other 
ordinances  of  the  common  council  authorizing  their  issue.  The  amount  of  such  bonds 
outstanding  on  January  1,  1889,  was  $4,593,400. 

2.  Bonds  issued  under  the  provisions  of  6,  Ch.  383,  L.  1878  176  Con.  Act)  to 
refund  or  redeem  before  mntiirity  bonds  issued  prior  to  June  3,  1878,  which  by  the 
terms  of  their  issue  had  been  made  payable  from  taxation.  The  amount  of  sucli  bonds 
outstanding  on  January  1,  1889,  was  $9,700,000. 

3.  Bonds  issued  after  June  3,  1878,  for  the  payment  of  which  no  provision  other- 
wise than  from  taxation  had  been  made  in  the  statutes  authorizing  their  issue.  The 
amount  of  such  bonds  outstanding  on  January  1,  1889,  was  $23,007,553.11  (exclusive  of 
water  bonds  to  the  aiuount  of  $20,900,000,  for  wliich  annual  installments  were  raised  by 
taxation  and  credited  to  *'  Redemption  Fund,  No.  2"). 

4.  Bonds  issued  prior  to  June  3,  1878.  originally  payable  from  taxation.  Amount 
outstanding  on  January  1,  1889.  was  $08,828,142. 

Sul)sequently,  under  the  provisions  of  Chapter  79  of  the  Laws  of  1889,  the  bonds 
issued  for  the  new  parks  in  the  23rd  and  24th  wards  and  in  Westchester  county  were 
made  a  direct  charge  upon  the  sinkine  fund. 


20 


By  charging  this  amount  against  the  interest  hmn  instead  of 
the  tax  levy,  the  surplus  revenues  of  the  interest  fund,  which  the 
Bonded  Indebtedness  Act  had  specified  as  one  of  the  pledged 
appropriations  of  the  redemption  fund,  were,  of  course,  depleted 
accordingly — a  clear  violation  of  the  ^'contractual  pledge." 

Protests  against  this  plan  did  not  fail  to  appear  in  the  public 
press ;  but  so  ample  appeared  to  be  the  security  of  the  city's  bond- 
holders that  the  validity  of  the  act  embodying  these  suggestions 
(Chapter  178,  Laws  1889),  has  never  been  called  into  question  in 
the  courts.  The  legislature  authorized  the  board  of  estimate  and 
apportionment  to  ''  reconsider,  revise  and  amend  the  final  estimate 
for  1889"  (passed  in  the  preceding  December),  and  the  sum  of 
$2,653,684.56  was  accordingly  stricken  therefrom. 

The  effect  of  the  act  of  1889  upon  the  Bonded  Indebtedness 
Act  may  be  stated  as  follows:  first,  it  practically  repealed  the 
provision  in  the  act  of  1878  relative  to  the  raising  by  taxation  of 
installments  for  the  redemption  of  all  bonds  issued  after  June  3rd, 
of  that  year  and  made  them  a  residual  charge  upon  the  ample 
ordinary  revenues  of  the  Redemption  Fund;  secondly,  it  brought 
about  a  partial  return  to  the  policy  of  the  act  of  1862,  which  per- 
mitted the  surplus  revenues  of  the  interest  fund  to  be  applied  to 
the  reduction  of  taxation,  and  conceivably  (if  the  interest  due  on 
the  bonds  held  for  investment  by  the  commissioners  of  the  sinking 
fund  should  increase  more  rapidly  than  the  revenues  of  the  interest 
fund)  might  some  day  result  in  the  entire  absorption  of  the  fund 
for  that  purpose.^ 

The  revenue  of  the  redemption  fund  dropped  from  $8,903,- 
284.80  in  1888  to  $6,444,761.39  in  the  following  year.  Yet  such 
have  been  its  recuperative  qualities,  due  to  the  rapid  growth  of  its 
principal  sources  of  revenue,  that  its  revenue  amounted  to  $10,- 
266,488,07  in  1897  and  $12,592,31<».46  in  1900.' 

'  The  pr  »otic^l  effects  of  the  act  of  1889  upon  subsequent  tax  levies  have  been  as  fol- 
lows: Tlie  amortizing  installments  (which,  if  that  act  had  not  been  passed,  would  have 
been  raised  by  taxation)  increased  gradually  from  $975  769  03  in  1S89  to  $3,485,557.72 
in  1900.  Tiie  auDiial  interest  cbarge  on  sinking  fund  holdings  (which  otherwise  would 
have  been  inserted  in  rhe  tax  levij-s  instead  of  paid  from  the  interest  fund),  increased 
from  $1  639  450.34  in  1889  to  $3,747,022.84  in  1900.  The  aggregate  of  these  items, 
including  interest  compounded  at  three  per  cent  (which  would  also  have  borne  its 
share  in  iucreasiag  taxation),  amou'its  to  $83,085,759  95,  wh  ch  represents  the  total  sav- 
ing to  the  taxpayers  during  these  twelve  years. 

^  These  tigur-'s  include  the  ;im  )urits  raised  hy  taxation  as  installments  on  water 
,onds  (consiituiing  Redemption  Fund,  N-t.  2). 


21 


CONDITIONS  EXISTING  AT  TllK  DAT!-:  OF  CONSOLIDATION. 

During  the  ten  years  preceding  the  Greater  New  York  consol- 
idation, and  especiahy  during  the  last  three  years  of  this  period, 
the  bond  issnes  of  the  city  of  New  York  were  much  larger  than  at 
any  other  time  in  its  history.  During  the  years  188S-1897,  inclu- 
sive, the  issues  (excluding  $7,000,000  refunding  bonds)  aggregated 
$138,382,64:9.4:1,  the  principal  objects  of  expenditure  being  as  fol- 
lows: water,  $25,877,000;  docks,  .^^20,800,000;  school  houses,  §18,- 
725,365.97;  other  pubhc  buildings,  $10,746,400.64;  new  parks  in 
the  23rd  and  24th  ^vards,  $9,823,100;  other  parks,  parkways  and 
drives,  $11,771,493.95  ;  assessment  bonds,  $13,043,53().zl  ;  repaying 
streets,  $10,169,308  ;  and  bridges,  $8,032,290.37. 

The  funded  debt  showed  the  following  increase: 

Dec.  31,  1887.      Dec.  31,  1897. 

Total  Funded  Debt,   $128,268,719  45  $223,018,033.78 

Less  Sinking  Fund  Investments,.     34,057,319.45  84,192,672.51 

Net  Funded  Debt,   $94,211,400.00  $138,825,361.27 

In  other  words  the  revenues  of  the  sinking  fund  during  this 
ten  year  period  had  been  so  large  that  new  bond  issues  aggregat- 
ing $138,382,649.41  had  effected  an  increase  in  the  net  funded  debt 
of  only  $44,613,961.27.  It  is  also  a  rather  remarkable  coincidence 
that  the  net  funded  debt  on  December  31,  1897,  was  almost  exactly 
the  same  in  amount  as  the  aggregate  of  bonds  issued  during  the 
ten  preceding  years. 

The  sinking  fund  problem  which  had  to  be  faced  by  the  fram- 
ers  of  the  Greater  New  York  charter  was  not  simple.  The  sinking 
funds  brought  into  the  financial  system  of  the  new  city  from  the 
several  municipal  corporations  annexed  to  the  city  of  New  York 
require  but  little  comment.  From  the  city  of  Brooklyn  came  tw^o  : 
The  Sinking  Fund  of  the  City  of  Brooklyn  and  The  Water  Sinking 
Fund . 

The  former  consisted  almost  exclusively  of  annual  amortizing 
installments  raised  by  taxation  under  laws  authorizing  the  issue  of 
certain  bonds  which  constituted,  however,  only  about  twenty- 
seven  per  cent  of  the  entire  funded  debt  of  the  city  of  Brooklyn.^ 

'  Tlie  hi><i()ry  of  Ihe  IJiooklyii  sitiUiii^  fuuil  mny  he  brii  fl\  MinntiMiiZ' (1  aa  fol- 
lows : 

By  CHaptcr  I'iO  of  tlw  Laws  of  1835,  aint-Ddiiii,'  the  Ad  of  a'lKipcr  9'J;  incor- 
pormint?  Uk^  city  of  Brooklyn,  aiiOiorny  whs  prHnicd  to  borrow  $200, (K)()  on  the  credit 
of  the  city  for  the  purpose  of  erecting  public  ])iiil(lings.    Chiipier  l.lfi  of  the  Lnws  of 


22 


Thirty- se^en  per  cent  of  the  Brooklyn  debt  was  payable  simply 
from  taxation  as  it  matured,  a  little  over  nine  per  cent  from  col- 
lections of  assessments,  and  the  remainder — about  twenty  six  per 
cent  from  the  water  sinking  fund. 

The  water  sinking  fund  of  the  city  of  Brooklyn  was  derived 
from  the  net  surplus  income  from  the  public  water  works  after 
paying  interest  on  all  outstanding  bonds  issued  for  the  construction 
and  extension  of  said  works  and  after  discharging  any  other  claims 
by  law  chargeable  against  the  water  revenue.  It  was  provided, 
however,  that  when  this  surplus  exceeded  certain  specified  amounts, 
the  commissioners  of  the  sinking  fund  might,  in  their  discretion, 
apply  limited  portions  of  that  excess  "  to  the  reduction  of  the 
amount  which  must  be  inserted  in  the  annual  estimate  and  be 

1838  increased  this  amount  to  $500,000  and  created  a  sinking  fund  to  be  fed  by  annual 
tax  levy  installments  of  $5,000  which  were  to  be  "  inviolably  appropriated  and  applied 
to  the  redemption  of  the  loans  already  procured,  and  to  be  procured,  under  this  act  by 
the  said  city (§  8).  The  mayor,  treasurer  (afterwards  changed  to  the  auditor)  and 
comptroller  were  designated  as  ex-officio  the  commissioners  of  this  fund,  and  were 
authorized  to  invest  moneys  thereof  in  New^  York  state  or  United  States  bonds  and  to 
purchase  any  part  of  the  loans  of  the  city  of  Brooklyn  "  before  the  time  limited  for  the 
redemption  of  the  same.*' 

By  Chapter  325  of  the  Laws  of  1849  the  surplus  income  from  water  rents,  after 
deducting  all  expenses  and  charges  of  distribution  were  set  apart  as  a  sinking  fund  for 
the  payment  of  the  principal  and  interest  of  the  water  debt,  under  the  management  of 
the  same  commissioners. 

By  Chapter  22  of  the  Laws  of  1850  a  separate  sinking  fund  was  directed  to  be 
created  to  be  called  "the  Sinking  Fund  to  discharge  existing  liabilities."  and  to  be 
composed  of  ten  annual  installments  to  be  raised  by  taxation  to  redeem  bonds  which,  to 
the  amount  of  $65,000  were  authorized  to  be  issued  to  fund  floating  indebtedness. 

Chapter  22  of  the  Laws  of  1857  directed  that  $50,000  per  annum  should  be  raised 
by  tax  and  paid  into  the  sinking  fund  for  the  final  redemption  of  water  bonds. 

A  number  of  acts  of  similar  general  import  were  passed  from  time  to  time  by  the 
legislature,  each  providing  for  annual  installments. 

The  Water  Sinking  Fund  "  as  a  special  account  was  definitely  instituted  by  Chap- 
ter 396  of  the  Laws  of  1859;  but  in  actual  administration  no  separation  was  ever  made 
of  its  accounts  fiom  those  of  the  general  sinking  fund. 

On  February  24,  1890,  Mayor  Alfred  C.  Chapin  in  a  communication  addressed  to 
the  common  council  (Proceedings,  Bd.  of  Aid.,  1890,  Vol.  I,  p.  491)  stated  that  the  sink- 
ing fund  which  then  amounted  to  $10,459,892.19,  had  more  than  doubled  in  seven  years; 
that  the  amount  of  debt  falling  due  in  the  next  ten  years  was  small,  and  as  the  fund  had 
recently  increased  at  the  rate  of  $1,000,000  annually,  the  total  thereof  would  exceed 
$20,000,000  before  the  close  of  the  nineteenth  century;  that  the  present  holdings  of  the 
sinking  fund  exceeded  in  amount  all  the  permanent  debt  falling  due  in  the  next  fifteen 
years,  and  concluded  that  the  fund  had  been  *'  over  supplied  very  substantially  at  the 
expense  of  the  taxpayers  during  the  past  few  years."  This  conclusion  was  largely  based 
upon  the  principle  that  the  debt  service  for  revenue-producing  public  improvements 
should  be  a  charge  on  such  revenue,  and  upon  the  assumption  that  the  revenue  from  the 


23 


raised  by  tiixntioii  to  meet  the  interest  on  any  of  the  bonds  or 
obligations  of  the  city  of  Brooklyn." ' 

Three  small  sinking  funds  came  from  Long  Island  City  :  one 
for  the  redemption  of  revenue  bonds  under  the  provisions  of 
Chapter  782  of  the  Laws  of  189.)  ;  one  for  the  redemption  of  fire 
bonds  under  Chapter  122, -Laws  of  1894,  and  one  for  the  redemption 
of  water  bonds  under  Chapter  759,  Laws  of  1895. 

It  was  apparent  to  the  framers  of  the  Greater  New  Yoi  k  char- 
ter that  each  of  these  sinking  funds  might  be  permitted  to  work 
out  its  own  ends  without  inconvenience  to  the  tax[)ayers  and  with- 
out the  necessity  of  amendatory  legislation.  The  one  difficult  prob- 
lem w^as  the  disposition  to  be  made  of  the  great  redemption  fund 
of  the  former  city  of  New  York  with  its  tributary  interest  fund, 
and  what  scheme  to  apply  to  the  redemption  of  bonds  to  be  issued 
by  the  new  city  after  the  date  of  consolidation.  As  had  so  fre- 
quently happened  before,  political  exigencies  rather  than  economic 
principles  determined  this  question.  The  Greater  New  York  con- 
New  York  and  Brooklyn  Bridge  and  the  water  system  woul:l  lari!e]y  increai^e.  He  be- 
lieved that  it,  would  be  proper  to  cancel  bonds  held  by  the  sinking  fund  to  the  au)ount 
of  $7,333,000,  but  in  view  of  the  fact  that  $8)6,000  of  water  debt  fell  due  in  i be  follow- 
ing year  he  recommended  that  only  $6,371,737  37  be  cancelled,  involving  a  reduction  of 
the  annual  interesl  charge  of  $314,069  50.  Thtse  recommendations,  though  plainly 
threatening  the  efficiency  of  the  sinking  fund,  were  carried  inU)  effect  after  'he  i)ajJ8age 
of  Chapter  453  of  the  Laws  of  1890  by  the  commissioners  of  the  sinking  fund,  ^^ho  on 
June  27  and  June  30,  1890,  cancelled  $6,438,737.37  of  its  holdings  (mss.  Mi/t,  Com.  of 
tkeS.  F.,  1890,  pp.  62,  63). 

The  efficiency  of  the  Brooklyn  sinking  fund  has  been  greatly  impaired  by  fre- 
quent instances  of  maladministration,  sometimes  due  to  legislative  action  vacating  or 
reducing  assessments  pledged  to  redeem  bonds  whi(  h  had  been  paid  from  the  thinking 
fund,  though  to  tome  extent  such  losses  have  been  offset  by  the  method  adopted  in  the 
city  of  Brooklyn  of  calculating  annual  amortizing  inslallmcnis  wiihcut  regard  to  future 
accretions  of  compound  interest. 

Prior  to  the  date  of  this  communication  of  Mayor  Chapin,  bonds  to  the  amount  of 
$4,133,466.41  had!  been  issued  payable  from  taxauon  in  series  of  years  and  without 
sinking  fund  provision  being  made  therefor.  This  practice  was  continued  until  1895, 
wfcen  by  Chapter  648  of  the  Laws  of  that  year,  amortizing  installments  were  directed 
to  be  raised  for  the  redemption  of  all  bonds  thereafter  to  be  issued  "pursuant  to  the 
provisions  of  any  statute  authorizing  the  same,  but  which  by  the  provisions  of  such 
statute,  are  payable  from  taxation,  other  than  revenue  bonds  isstied  in  anticipation  of 
the  collection  of  taxes."  This  act  also  contained  a  provision,  modelled  ch).-ely  after  the 
New  York  city  Bonded  Lidebtedness  Act  of  1878,  authorizing  any  excels  or  surp'i:s  in 
the  sinking  fund  to  be  applied  to  the  liquidation  of  bonds  not  by  the  ternts  of  their 
issue  originally  i)ayable  therefrom.  In  view  of  the  methods  ado}it(  d  in  adniinistei  ing 
this  fund,  it  is  difficult  to  see  how  any  such  surplus  couhl  have  been  cxpectid  to  arise. 

1  ^  15,  Title  IV,  ch.  583,  L.  1888. 


solidation  had  been  vigorously  opposed  by  a  smaJl  but  determined 
minority  of  influential  taxpayers.  Threats  had  been  made  openly 
that  the  constitutionality  of  the  forthcoming  charter  would  be  at- 
tacked in  the  courts^  and  one  of  the  most  obvious  points  of  attack 
was  to  be  found  in  the  ^'contractual  pledge"  to  the  holders  of 
bonds  of  the  former  city  of  New  York,  that  all  the  enormous 
revenues  of  the  redemption  tund  should  continue  to  be  accumulated 
until  that  fund  had  redeemed  the  last  bond  payable  therefrom. 

It  was  determined  to  avoid  this  point  of  attack.  The  revenues 
of  the  ledemption  fund  were  to  be  applied  solely  for  the  benefit  of 
bondholders  of  the  old  city  entitled  to  its  security.  At  the  same 
time  new  sinking  funds  were  created  for  the  amortizing  of  debt  to 
be  issued  by  the  new  city,  to  be  composed  of  installments  to  be 
raised  annually  by  taxation,  which,  with  the  accumulations  of  in- 
terest thereon  should  be  sufficient  to  meet  and  discharge  such 
bonds  or  stocks  by  the  time  the  same  shall  be  payable." 

Two  new  funds  of  this  character  were  created:  one,  entitled 
''The  Water  Sinking  Fund  of  The  City  of  New  York"  '  which 
had  for  its  purpose  ''the  liquidation  of  the  principal  of  the  debt 
incurred  by  the  city  of  New  York,  as  hereby  constituted,  on  or 
after  January  1,  1898,  for  the  supply  of  water  as  provided  by  sec- 
tion ten  of  article  eight  of  the  constitution  of  the  state  of  New 
York";  the  other,  entitled  "The  Sinking  Fund  of  the  City  of 
York,"  which  had  for  its  purpose  the  liquidation  of  the  principal 
of  all  other  funded  debt  likewise  incurred  "as  to  which  no  provi- 
sion for  the  payment  thereof  otherwise  than  from  taxation  is 
made." 

The  president  of  the  council  was  substituted  for  the  recorder 
as  a  member  of  the  sinking  fund  comrnission,  the  new  funds  were 
to  be  administered  "in  like  manner  as  provided  by  the  ordinance 
of  the  mayor,  aldermen  and  coanmonalty  of  the  city  of  New  York, 
approved  by  the  mayor,  February  22,  1844,  so  far  as  the  same  may 
be  applicable,"  and  it  was  provided  that  the  board  should,  in 
respect  to  the  eight  sinking  funds  antedating  consohdation,  ad- 
minister the  same  "and  perform,  carry  out  and  exercise  the 
several  trusts,  powers,  obligations  and  duties  relating  thereto,  in 
the  same  manner  as  the  same  would  have  been  administered,  per- 
formed, carried  out  and  exercised  if  this  act  had  not  been  passed." 
As  to  all  future  issues  of  bonds  in  which  investments  might  be 


^  §  208,  Greater  New  York  Charier. 


2  §  206.  Ibid. 


25 


made  by  any  of  the  sinking  funds,  accruing  interest  was  to  be 
provided  foi-  by  taxation,  such  charges  upon  the  interest  fund 
being  tliereby  limited  to  the  holdings  on  December  31,  1S97,  by  the 
redemption  fund  of  bonds  of  the  former  City  of  New  York  J  The 
^'contractual  pledge"  of  the  Bonded  Indebtedness  Act  was  re- 
enacted,''^  and  it  was  provided  that 

The  assets  aiid  accounts  of  each  of  said  sinking  funds  shall,  except  as  berein- 
afi^'v  otherwise  pn  vided  b(  k(  pt  separate  and  distinct,  and  the  same  shall  in  all  respects 
be  administered  as  independent  trusts,  .subject  to  and  governed  by  the  several  provisions 
of  law  or  ordinance  hert^tofore  relating  thereto,  witli  the  intent  and  purpose  of  i)re. 
Serving  inviolate  tbe  rights  (.f  holders  of  bonds  and  stocks  heretof(>re  issued  by  any  of 
the  municipal  and  public  corporations  or  parts  thereor  hereby  made  part  of  the  City  of 
New  York  including  the  Counties  of  Kings  and  Richmond. 

Under  such  a  scheme  there  was  certainly  little  ground  left  for 
attacking  the  constitutionality  of  tht-  new  charter  on  account  of 
its  sinking  fund  provisions. 

The  charter  commissioners  seem  to  have  been  not  altogether 
forgetful  of  the  coming  day  when  the  redemption  fund  will  have 
completed  its  functions,  but  the  method  adopted  by  them  of  dis- 
posing of  its  enormous  revenues  is  destined  to  raise  in  the  near 
future  the  same  difficulties  which  were  experienced  under  the 
Bonded  Indebtedness  Act  of  187S.  The  most  remote  maturity  date 
of  bonds  redeemable  from  the  redemption  fund  is  192S.  It  will 
prove  sufficiently  burdensome,  as  will  be  seen  hereafter,  to  accumu- 
late unnecessarily  the  prodigious  revenues  of  that  fund  for  so  long 
a  period  without  repeating  after  that  time  the  i;nistakes  of  the  past. 
The  financial  inconvenience  of  any  sinking  fund  system  bottomed 
on  resources  derived  otherwise  than  from  taxation  would  seem  to 
have  been  sufficiently  demonstrated  by  the  experience  of  New  York 
cit)%  lasting  over  a  period  of  eighty  four  years,  and  it  would  have 
been  better  to  have  provided  for  the  transfer  of  the  revenues  of  the 
redemption  fund,  as  they  become  released  from  existing  pledges,  to 
the  general  fund  for  the  reduction  of  taxation.  Instead  of  that,  it 
was  provided  that 

Whenever  the  bonds  and  stocks  outstanding  on  December  31,  18U7,  and  being 
charges  or  liens  on  any  of  the  sinking  funds  hereby  made  subject  to  tl)e  control  of  the 
Commissioners  of  the  Sinking  Fun<l,  shall  in  respect  to  any  such  sinking  fund  be  wholly 
discharged,  liquidated  or  canceled,  ii  shall  thereupon  be  lawful  for  the  CommissionerB 
of  the  Sinking  Fund  to  cancel  such  bonds  of  the  C'orporation  of  the  City  of  New  York, 
issued  on  or  after  January  1, 1898,  as  may  be  held  by  such  sinking  fund  and  tlie  revenues 
of  puch  sinking  fund  when  tlms  relieved  of  nuch  liens  or  charges  shall  thereupon  and 


1  §  209.  GreaUr  New  Yo''k  Charier. 


«  ^  211,  Ibid. 


26 


thereafter  be  paid  into  the  Sinking  Fund  of  llie  City  of  New  York,  as  herein 
created,  1 

And  it  was  furthermore  provided  that  the  amount  of  such  pay- 
ments into  the  sinking  fund  of  the  city  of  New  York  should  be 
deducted  from  the  annual  tax  levy  installments.  Practically  this 
was  a  return  to  the  system  provided  by  the  Bonded  Indebtedness 
Act,  as  amended  by  the  Act  of  1889." 

The  effect  of  this  provision  can  best  be  appreciated  by  fore- 
casting the  probable  condition  of  the  sinking  fund  in  1928  when 
this  contemplated  transfer  might  take  place. 

EMBARASSMENT  WHICH  WILL  RESULT  FROM  THE  EXISTING  SYSTEM. 

On  December  31,  1897,  the  outstanding  fanded  debt  of  the  city 
of  New  York  payable  from  the  redemption  fund  No.  1  (excluding 
water  bonds  issued  after  the  constitutional  amendment  of  1884) 
was  $169,264,197.57.  The  investments  and  cash  of  redemption 
fund  No.  1  on  that  date  (excluding  in  the  same  manner  the  assets 
of  redemption  fund  No.  2)  amounted  to  $72,333,286.91— or 
$96,930,910.66  less  than  the  entire  debt  redeemable  therefrom. 

During  the  five  year  period,  1888-1892  inclusive,  the  revenues 
of  the  redemption  fund  (excluding  always  the  installments  for 
water  bonds)  were  $32,846,750.91.  During  the  next  five  year 
period  1893-1897,  inclusive,  such  revenues  were  $37,229,773.59. 
This  shows  an  increase  of  more  than  thirteen  per  cent.  For 
obvious  reasons  the  future  percentage  of  increase  in  the  revenues 
of  the  redemption  fund  is  likely  to  exceed  rather  than  fall  short  of 
this  figure. 

Daring  the  period  1898-1900,  inclusive  the  aggregate  revenues 
of  redemption  fund  No.  1  show  an  increase  of  more  than  sixteen  per 
cent  over  the  revenues  of  the  preceding  three  year  period.  While 
this  has  been  due  to  a  slight  extent  to  the  accidental  results  of  con 

^  Proiessor  Durand  in  his  Finances  of  New  York  City  (p.  318),  expresses  the  hope 
that  the  provifcion  above  cited  will  not  be  ioteiprcted  "  so  as  to  require  heaping  up 
accamulalions  after  the  funds  have  fully  equalled  the  bonds  payable  from  them,  but 
before  such  bonds  are  due."  Unfortunately  the  language  of  the  law  seems  wholly  free 
from  ambiguity  on  this  point.  As  to  whether  the  legislature  would  be  justified  in 
amending  this  provision  so  that  it  should  operate  when  the  redemption  fund  invest menis 
equalled  the  entire  debt  payable  therefrom  involves  distinctly  the  same  interesting  ques- 
tion which  presented  itself  at  the  time  of  the  passage  of  the  Bonded  Indebtedne^s  Act 
of  1878. 

2  Except  that  interest  on  sinking  fund  investments  in  bonds  issued  after  January 
1. 1898.  would  continue  to  be  paid  from  taxation  instead  of  from  the  interest  fund. 


27 


solidation  which  widened  the  field  from  which  certain  revenues  are 
collected,  it  is  mainly  attributahle  to  two  causes  of  a  continuing 
nature  :  (1)  Normal  increase  of  the  most  important  revenues,  and 
(2)  the  change  effected  by  the  charter  in  the  method  of  paying  in- 
terest on  new  sinking  fund  investments.^  It  is  manifest  that  as 
the  character  of  the  sinking  fund  holdings  gradually  changes  from 
bonds  of  the  former  city  of  New  York,  the  interest  on  which  is  paid 
from  the  interest  fund,  to  bonds  of  the  new  city,  the  interest  on 
which  is  payable  from  taxation,  this  percentage  of  increase  will 
grow  still  more  rapidly.  On  the  whole,  it  seems  very  conservative 
to  estimate  that  each  future  five  year  period  will  show  an  average 
increase  of  fifteen  per  cent  over  each  similar  preceding  period.' 

Assuming  such  a  percentage  of  increase,  the  accumulations 
of  this  fund  will,  at  the  close  of  the  year  1908,  exceed  the  entire 
debt  redeemable  therefrom  by  $6,444,070.87,  and  in  the  year  1928, 
when  its  functions  will  cease,  there  will  be  an  accunmlated  sur- 
plus of  $297,059,754.10.^  It  is  practically  certain  that  this  colossal 
investment  will  be  in  bonds  and  stocks  of  the  city.  At  three  per 
cent  the  annual  interest  charge  on  this  amount  alone  would  be 
$S,  929, 7 92. 62.  The  amortizing  installment  to  be  raised  by  taxation 
on  these  bonds  would  be  $7,648,279.52.^     The  following  year  under 

^  Excluding  revenue  bonds,  the  sinking  funds  held  on  December  31,  1900,  ^22,- 
974,770.21  of  the  debt  of  the  new  city  of  New  York  issued  since  consolidation. 

'  Prof.  Durand  assumes  a  considerably  larger  percentage  of  increase.  Finanus 
of  New  York  City,  p.  339. 

•  All  of  the  b^nds  which  are  preferred  liens  on  the  redemption  fund  might  tinaliv 
be  redeemed  in  the  year  1910;  though  some  of  these  bonds  ma}',  at  the  pleasure  of  the 
city,  run  until  1928  and  1929. 

In  regard  to  the  bonds  issued  after  June  3,  1878,  it  was  specifically  provided  by  Ch. 
178,  L.  1889,  (§192  Con.  Act)  that  the  "setting  apart"  of  the  surplus  revenues  of  the 
redemption  fund  for  their  amortization  should  continue  "  until  other  provision  therefor 
may  be  hereafter  made  by  law."  It  is  clear,  therefore,  that  as  to  this  latter  class  of 
bonds  the  holders  thereof  possess  none  of  the  contractual  rights  of  the  preft  ried  lienors, 
and  that  the  legislature  may  at  any  time  alter  this  provision  of  law  without  the  slightes; 
violation  of  good  faith.  Until  such  legislation  is  obtained,  however,  the  revenues  C)f  the 
redemption  fund  must  be  regarded  as  pledged  until  1928.  which  is  th»'  most  remote 
maturity  date  of  the  bonds  payable  under  the  provisions  of  Ch.  178,  L.  18b9. 

"*  It  is  useless  to  attempt  to  forecast  the  additional  interest  which  would  be  paid 
in  1928  on  other  bonds  outHlanding  (not  heid  hy  ihe  sinking  luod)  as  this  depends  upon 
the  extent  of  future  bond  issUv-siu  all  fields  <  f  niunicipal  activity. 

*  The  amount  of  annual  sinking  fund  icstallments  depend  upon  two  facti^rs:  rate 
of  interest  assumed,  and  duratiDU  of  the  tt  ims  of  the  bctnds.  All  sinking  fund  invest- 
ments for  many  years  have  been  on  a  three  ])tr  cent  basis,  and  this  rate  hns  been  assumed. 
Terms  of  future  issues  are,  of  course,  problematical,  but  in  this  (alculution  the  aversgf 
of  past  actual  issues  has  been  taken  as  a  basis.  The  multiplier  iised  has  been  2.5678 
per  cent. 


28 


the  provisions  of  the  charter,  all  these  bonds  held  by  the  redemption 
fund  wou?d  be  canceled  and  there  would  be  a  sudden  drop  in  the 
tax-levy  of  $16,578,072.14. 

It  is  certainly  unnecessary  to  emphasize  by  elaboration  the 
objections  to  any  sinking  fund  scheme  which  perniits  such  results. 
That  taxation  for  the  amortizing  of  public  debt  should  bear  evenly 
throughout  the  term  of  its  existence  is  an  elementary  proposition. 
Nevertheless,  prevailing  conditions  with  their  inevitable  results  are 
not  to  be  gotten  rid  of  jauntily  by  a  mere  stroke  of  the  legislative 
pen.  While  it  has  been  the  aim  of  this  paper  to  disclose  the  de- 
fects of  the  New  York  sinking  fund  system  and  to  explain  histori- 
cally the  causes  which  have  led  to  their  perpetuation,  it  has  certainly 
failed  of  its  purpose  if  it  is  not  now  apparent  that  all  methods  of 
escape  from  existing  difficulties  are  likely  to  be  attended  with 
more  or  less  embarrassment. 

The  difficulties  which  confronted  the  Greater  New  York 
charter  commission  of  1897  were  not  of  their  own  creation.  They 
were  derived  in  large  part  from  the  Bonded  Indebtedness  Act  of 
1878,  and  reference  has  been  made  to  the  reasons  of  political  ex 
pediency  w^hich  induced  this  commission  to  treat  the  sinking  fund 
problem  with  caution  approaching  timidity. 

The  commission  appointed  in  ivOO  by  Governor  Roosevelt  to 
revise  the  charter  has  recommended  no  !?ubstaDtial  changes  in  this 
system.^ 

The  problem  which  demands  solution  is  simply  this  :  Should 
the  solemn  pledge  to  the  holders  of  bonds  of  the  city  of  New  York 
contained  in  the  Bonded  Indebtedness  Act  of  1878  and  continued  to 

^  The  writer,  as  a  member  of  that  comaiissiou,  feels  that  a  few  woids  of  explana 
tion  may  not  be  improper  in  respect  to  this  omission.  This  commission  bad  ailoUd 
to  it  by  legislative  enactment  a  period  of  time  scarcely  sufficient  to  perform  in  a  satis- 
factory manner  the  difficult  task  with  \^hich  it  had  been  charged.  Especially  in  the 
last  mouths  of  its  labors  human  endurance  was  taxed  to  its  limits  in  disposing  of 
those  leading  principles  and  details  of  municipal  government  which  involved  struct- 
ural changes  in  the  charter.  Amendment  of  the  sinking  fund  system  involved  no 
such  structural  change.  It  did  ins'olve,  however,  a  degree  of  careful  consideration  and 
discussion  which  was  at  that  time  impossible  to  obtain.  The  writer,  therefore,  did  not 
bring  before  the  commission  the  problems  which  form  the  subject  of  this  article, 
believing,  first,  that  they  were  of  such  importance  as  to  warrant  the  focussed  attention 
of  the  public  and  the  legislature  ;  secondly,  that  they  could  be  equally  well  treated  at 
any  session  of  the  legislature  in  the  near  future,  and  lastly,  that  the  disposition  which 
should  now  be  made  of  them  ought  at  last  to  be  final  and  the  product  of  mature 
economic  judgment,  rather  than  (as  has  been  hitherto  so  often  the  case)  the  hasty 
and  ill-digested  product  of  temporary  expediency. 


29 


the  present  day  by  subsequent  re-enactment  be  regarded  as  an 
irremovable  obstacle  in  tlie  way  of  scientific  debt  redem j»ti<'t). 

On  the  one  hand,  the  respect  heretofore  shown  for  tliis  pledge 
may  be  illustrated  by  the  fc  llowing  extract  from  a  well-known  and 
widely  pubhshed  opinion  of  one  of  the  city's  most  enunent  legal 
advisers — Corporation  Counsel  Lacombe  : 

The  idea  that  the  sinkinix  fund  is  never  to  be  in  amount  in  excess  of  ihe  debts 
chargeable  thereti)  or  payable  therefrom,  is  fallacious  and  must  be  avoided.  Thouiih 
called  a  "Sinking  Fund,"  it  is  in  fact  a  reserve  fund  which  does  not  disappear  when  its 
accumulations  equal  the  amount  of  the  bonds  to  whose  fcecurily  it  is  pledged.  The 
comniissioners  are  entitled  and  bound  to  hold  under  their  trust  all  the  funds  beloni^ing 
or  appropriated  thereto,  until  every  debt  chargeable  thereon  is  in  fact  paid  in  full,  prin- 
cipal and  intere.*t.  The  creditors  of  that  fund  are  entitled  to  the  security  for  tlieir  debts 
afforded  by  all  the  accumulations  of  the  fund,  no  matter  how  much  the  surplus  thereof 
may  be.  Such  accumulations  or  surplus  the  city  cannot  take  from  the  commi>sioiiers, 
iiorustt  for  any  purpose  whatever.  It  cannot  be  in  any  way  put  beyond  the  reach  of  the 
creditors  of  the  sinkinir  fund.  It  must  be  held  intact  for  the  purposes  of  tli»)  trust,  and 
the  ci editors  of  the  fund  are  entitUd  at  the  maturity  of  their  debts,  to  be  ]>Hid  tlierefrom 
in  th(i  order  of  the  priorities  ni  their  claims  thereon,  and,  in  the  meantimt  .  to  have  the 
full  fund  held  in  trust  as  a  security  for  such  payment. 

The  surplus  of  the  Sinking  Fund  can  no  more  be  destroyed  or  withdrawn  from  :he 
trust,  or  the  operation  thereof,  than  could  the  equity  of  redemption,  surplus  or  increased 
value  of  laud  covered  by  a  mortgage  or  trust  deed  to  secure  a  debt  be  destroyed,  with 
drawn  from  the  mortgage  or  trust  deed  or  from  the  operation  thereof.^ 

On  the  other  hand,  the  important  fact  of  very  practical  iuiport 
may  be  alleged  that  by  the  Act  of  1889  the  contractual  pledge'' 
was  undeniably  violated,  and,  so  ample  was  the  security  of  a  city 
bond  generally  regarded,  that  no  bondholder  cared  to  contest  the 
validity  of  this  statute  iu  the  courts. 

Perhaps  it  may  he  said  that  the  solution  of  this  question  lies 
rather  in  the  realm  of  finance  than  of  law.  If  so,  statutory  con- 
struction becomes  of  less  practical  importance  than  the  opinion  of 
holders  of  city  bonds. 

REMEDIES  DISCUSSED. 

The  extent  to  which  public  creditors  are  influenced  at  the 
present  time  by  the  existence  of  sinking  funds  designed  to  provide 
means  for  the  liquidation  of  their  claims  may  fairly  be  said  to  be  a 
debatable  question.  In  the  early  history  of  public  loans,  when 
public  credit  was  but  little  understood,  that  influence  was  un 

^  The  fact  that  oue  of  the  moal  impDrtant  conclusions  of  this  opinion  was  rejected 
by  the  Court  of  Appeals  (Bank  for  Savings  v,  Grace,  102  N.  Y.  313).  should  not  deprive 
;he  reasoning  of  the  learned  corporation  counsel  on  the  point  above  discussed,  of  the 
re^-pect  to  which  it  is  entitled. 


30 


doubtedly  very  great.  What  Professor  Ross  has  aptly  termed  the 
^Hheatrical  element  in  practical  fiDance"  was  undoubtedly  served 
by  the  sinking  fund  based  upon  specific  revenues,  ''characteristic 
of  new  countries  in  the  earlier  stages  of  financiering  or  of  nations 
threatened  with  disaster  to  public  credit."  But  to-day  in  the  case 
of  civilized  states  or  metropolitan  comnmnities,  it  is  rather  the  state 
of  the  public  credit  which  controls,  and  in  the  common  estimate  of 
this  there  are  really  but  two  factors  :  ability  and  williugness  to 
pay. 

That  sinking  funds  add  to  the  popularity  of  municipal  loans  is 
unquestionable.  But  the  cause  for  this  is  to  be  sought  rather  in 
the  fact  that  sinking  funds  provide  an  easy  and  convenient  method 
of  liquidating  indebtedness  (really  adding  to  a  city's  ''ability  to 
pay")  than  in  any  sense  of  proprietorship  in  accumulated  funds. ^ 

Certainly  do  valid  reason  can  be  forthcoming  why  a  bond- 
holder should  prefer  to  be  paid  from  specific  revenues  of  a  city 
rather  than  from  the  proceeds  of  taxation.  Nor  is  it  likely  that  a 
bondholder  would  ask  greater  protection  of  the  law  than  the  secur- 
ity of  a  sinking  fund  which  would  with  certainty  provide  means 
for  the  ultimate  discharge  of  his  debt. 

In  the  history  of  the  New  York  city  redemption  fund,  it  seems 
to  have  been  at  all  times  assumed  that  its  surplus  revenues  might, 
after  meeting  preferred  charges  thereon  as  they  fell  due,  be  made  ap- 
plicable to  amortizing  new  issues.  Yet  this  was  but  one  means  of 
lessening  the  surplus  which  would  otherwise  accumulate  for  the 
security  of  the  preferred  liens.  If  the  preferred  lienors  were  so  con- 
fidently expected  to  view  with  complacency  the  appropriation  of  this 
surplus  to  the  security  of  other  bondholders,  why  should  they  not 
experience  w^th  equal  contentment  the  transfer  of  such  surplus  for 
the  benefit  of  the  taxpaying  public  ? 

These  are  some  of  the  considerations  which  must  soon  receive 
attention  in  the  final  determination  of  the  disposition  which  should 
be  made  of  the  accumulations  of  the  sinking  fund  for  the  redemp- 
tion of  the  city  debt. 

Three  remedies  suggest  themselves  : 

First :   A  return  in  whole  or  in  part  to  the  scheme  embodied 

^  la  fact  the  idea  of  accumulation  is  wbr)!!}  absent  from  the  conception  of  one  of 
the  most  efficient  forms  of  a  sinking  fund — the  fixed  sinking  fund  with  a  constant  ap- 
propriation, -which,  by  periodic  purchases  and  extinction  of  outstanding  debt,  causes 
progressive  declines  in  interest  charges  and  correspr.ndinglj  rapid  amortization. 


in  the  act  of  1889.  This  would  still  leave  in  operation  tlie  ohjec- 
tional)le  features  of  the  specific  revenue  system  and  would  be  open 
to  the  same  theoretical  chnrge  of  bad  faith  involved  in  tlie  repudiation 
of  the  ^'contractual  ])ledge''  of  18TS.  It  would,  however,  amelior- 
ate the  financial  hardships  of  approaching  years,  and  would  possess 
the  sentimental  advantage  of  following  a  precedent. 

Second  :  To  provide  that  whenever  hereafter  the  local  authori- 
ties shall  have  inserted  in  the  tax  levy  full  and  sufficient  amortiz- 
ing installments  for  the  redemption  of  all  bonds  payable  from  the 
redemption  fund  all  the  specific  revenues  of  the  city  now  paid  into 
that  fund  (excepting,  of  course,  interest  on  investments  and 
deposits),  and  accruing  during  that  year,  might  be  credited  to  the 
General  Fund  for  the  Reduction  of  Taxation.^  This  w^ould  un- 
doubtedly be  the  most  logical,  scientific  and  satisfactory  method, 
but  it  remains  to  be  seen  whether  it  would  not  call  forth  vigorous 
protests  from  some  holders  of  bonds  of  the  city  of  New  York  issued 
prior  to  consolidation.^ 

Third :  To  adopt  the  last  mentioned  method  from  the  date 
when  the  last  of  preferred  lien"  bonds  shall  have  been  re- 
deemed— ?*.  e.,  in  1910.  Such  a  course  would  be  entirely  free  from 
technical  objection  (see  note  number  3,  page  27).  The  chief  dis- 
advantage of  this  scheme  w^ould  be  the  unnecessary  taxation  to  be 
borne  for  the  debt  service  until  1910.^ 

^  Scarce!}^  any  public  attention  is  now  given  to  the  administration  of  the  sources 
of  the  great  revenues  of  the  sinking  funds.  They  have  practically  no  immediate  effect 
upon  taxation.  If  the  annual  taxes  were  largely  dependent  in  amount  upon  the  size  of 
these  revenues — as  they  would  be  if  such  revenues  were  paid  into  the  general  fund — it 
is  fair  to  assume  that  this  important  side  of  m\micipal  administration  would  benefit  from 
the  closer  public  scrutiny  which  would  inevitably  follow. 

2  In  1900  the  revenues  of  Redemption  Fund,  No.  1,  exceeded  the  amount  which 
would  be  required  for  an  annual  installment  to  redeem  all  the  bonds  payable  therefrom 
by  about  five  and  one-half  millions  of  dollars.  This  amount  repre^ents  tlie  unnecessary 
burden  of  taxation  imposed  by  reason  of  an  excessive  debt-service.  The  appended 
statement  shows  year  by  year  the  excess  of  sinking  fund  revenues  over  the  amounts 
necessary  to  amortize  bonds  issued  since  June  3,  1878.  Amortizing  installments  to 
redeem  the  remainder  of  the  debt  payable  from  the  tedemption  fund  would  average 
about  $1,165,000  throughout  the  period  covered  by  this  statement.  It  is  to  be  noted 
that,  while  the  revenues  of  the  redemption  fund  are  steadily  increasing,  the  installments 
required  to  redeem  bonds  of  the  former  city  of  New  York  are  naturally  decreasing 
owing  to  cancellations  of  maturing  bonds. 

^  This  year,  1901,  the  installments  raised  by  taxation  for  the  two  new  sinking 
funds  provided  by  the  chnrtrr  am.ount  to  $1,629,86'J.07.  If  new  issues  of  bonds  should 
continue  to  be  made,  running  for  similar  average  periods  nnd  in  the  same  amounts  for 
the  next  six  years  as  in  1900.  these  installments  would  hereafter  be  :  in  1902,  $2,171,- 


32 


The  iaore.ised  burdens  of  taxation  imposed  upon  the  tax- 
payers of  New  York  city  by  the  operation  of  the  Greater  New  York 
Charter  have  aroused  a  more  critical  spirit  in  regard  to  municipal 
expenditures  than  has  been  manifested  for  some  tim.e,  and  it  is  in- 
conceivable that  serious  public  discussion  can  be  long  postponed  in 
regard  to  a  subject  which  involves  a  possible  lightening  of  the  tax 
burden  in  an  amount  which  already  exceeds  five  millions  of  dollars 
annually,  and  which  is  destined  soon  to  reach  even  much  more 
formidable  proportions.  ^ 

During  the  next  few  years  it  may  be  possible  for  the  commis- 
sioners of  the  sinking  fund  to  apply  palliative  measures  by  making 

1688  46;  in  903,  $3,713,414.85;  m  1904,  $3,255,191.24;  in  1905.  $3,796.967  63;  in  1906, 
$4,838,744  02  ;  in  1907,  $4,880,520  41;  in  1908,  $5,422,296.80;  in  1909,  $5,964,073.19,  and 
in  1910,  $6  505,849.f'i8.  It  might  be  possible,  however,  for  the  commissioners  of  the 
sinking  fund  lo  hasten  the  redemption  of  the  preferred  lieu  "  bocds  by  repurchases 
from  the  public  under  a  system  of  competitive  bidding.  Of  the  "preferred  lien"  bonds 
outstanding  and  held  by  the  public,  $475,000  mature  in  1902,  $20,000  in  1907  (both  first 
liens),  $6,900,000  in  1908  (second  lien),  $9,357,000  ("  park"  lieu)  in  1909,  and  $2,800,000 
(sec  ond  ien)  in  1910— making  a  total  of  but  $19,552,000. 

^  It  raiy  readily  be  imagined  that  in  the  financial  administration  of  the  city  there 
have  been  not  a  few  compensating  advantages  derived  from  the  overflowing  revenues 
of  the  sinking  fund.  The  necessity  for  refunding  operations  has  seldom  arisen.  With 
a  modicum  of  forethought  it  has  bf  en  possible  to  husband  the  resources  of  the  sinking 
fund  so  that  large  amounts  of  maturing  debt  could  be  easily  redeemed  without  recourse 
to  tiie  t«x  levy.  By  far  the  larger  part  of  annual  new  issues  of  bonds  have  been  absorbed 
directly  by  the  sinking  fund  for  investment,  thus  avoiding  the  expenses  and  delays  of 
frequent  public  bond  sales,  and  rendering  it  possible  to  make  close  adjustments  of  cash 
to  the  needs  of  the  city  treasury.  Many  actual  economies  in  regard  to  liabilities  on 
interest  account  have  been  possible,  and  from  the  standpoint  of  mere  convenience  to 
the  fi-^cal  officers  of  the  city,  the  situation  has  been,  in  these  respects,  thoroughly  agree- 
able. 

It  should  not  be  forgotten,  moreover,  that  since  consolidation  the  city  has  some- 
times been  perilously  near  to  the  constitutional  limit  of  indebtedness;  and  to  the  exces- 
sive contributions  of  the  taxpayers  to  the  debt  service  in  the  past  is  due  the  fact  that  the 
ne'  d'  bt  of  the  city  is  not  at  present  much  larger  than  it  is.  If  a  change  in  the  sinking 
fund  system  should  ensue,  which  would  result  in  the  surplus  revenues  of  the  redemption 
fund  being  applied  to  the  reduction  of  taxation,  it  is  not  unlikely  that  in  the  near  future 
many  expenditures  which  are  now  payable  from  the  proceeds  of  bond  sales  wou'd  have 
to  t»e  made  from  taxation.  This  consequence,  however,  would  not  be  altogether  deplor- 
at>le.  The  city  of  New  York  now  defrays  from  bond  account  many  liabilities  which 
are  not  in  the  nature  of  permanent  public  improvements.  Among  the  m"st  striking  of 
these  may  be  mentioned  the  stock  or  plant  of  the  department  of  street  cleaning,  consist- 
iuu  lHr>:elv  of  horses  carts,  harness,  burlap  bags  and  similar  articles  serviceable  for  but 
a  f  months,  which  are  paid  for  from  time  to  time  from  the  proceeds  of  l>ond8  ma'ur- 
inn  in  thirty  or  forty  years. 

All  expenses  of  ordinary  maintenance  of  the  dock  department  are  similarly  defrayed. 


33 


serious  efforts  to  rei)urcbase  from  the  public  outstanding  bonds 
payable  from  the  redemption  fund.  But  it  would  scarcely  be  pos- 
sible thus  to  redeem  literally  the  whole  of  such  outstanding  debt; 
and  if  the  redemption  fund  must,  under  the  provisicais  of  the 
charter,  be  treated  as  an  inviolable  trust  fund  until  every  bond 
now  legally  redeemable  from  it  is  paid,  the  relief  afforded  by  such 
purchases  would  prove  but  temporary. 

The  repaying  of  streets,  -which  in  most  cities  is  properly  regarded  as  "  niaintenanre,"  is 
ikewise  made  a  charge  upon  the  public  debt.  Many  similar  instances  might  be  cited. 
It  would,  indeed,  seem  that  there  has  been  in  the  financial  history  of  the  city  an  uncon- 
scious endeavor  to  equalize  and  adjust  by  the?e  illogical  means,  the  abnormal  conditions 
which  prevail  in  regard  to  the  redemption  of  the  city  debt.  It  would  be  an  interc  sting 
study  to  analyze  the  purposes  for  which  the  city  of  New  York  issues  bonds  with  a  view 
of  aseeitaining  ihe  extent  to  which  payment  of  ordinary  current  expenses  is  thus  post- 
poned. But  these  considerations,  though  not  unimportant,  do  not  appear  suflBciently 
weighty  to  offset  the  criticisms  which  have  been  made  of  the  existing  sinking  fund 
system. 


(tables  follow.) 


34 


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Dock  ihd  Slip 


1.006,0(19  47 
1,670.916  4S 
714.409  06 


1,301,031  11 
1,411.104  m 
1.686,880  73 
1,848,603  04 


54,, i,™  00 
50  050  00 
38.050  00 


60,693  44 
443,148  I 
233.147  ' 


27,428  60 
25  337  00 
24.214  00 
33.046  60 


079  11 

485  78 
093  35 


10,1.59  ; 
14.276  ( 
9.606  1 


3.792  ( 
3.260  ; 
2,811  ' 
2.677  ' 
2  732  ! 
2.845  I 


I  07    $345,288  96    t6,797  00 


10.902  1 
14.474  : 
16.681  ' 


17,390  12 
17,047  46 
14.910  03 


13.964  20 
8  429  20 

18.429  40 
8,066  63 

13,533  10 


T^BLE  II. 

Payment  of  Intereit  on  The  Cily  Dt 


15.664  72 
15  120  62 
9.232  27 


2.694  80 
7.002  18 
0,067  37 


6  293  30 
9  504  02 
3  016  18 


506  75 
340  7.1 


$6,608  67 
9,021  00 

14  610  00 
5,449  50 


13,191  00 
i,258  00 
;,640  00 


14,487  00 
16.464  00 
15,038  00 
16,455  00 


17.232  00 
i.522  00 
r.322  00 


926,617  59 
984.500  68 
,101,939  86 
,133,610  ( 
,130,852  ( 
143,281  83 
169.388  61 
224,605  01 
1,222,697  38 
313.058  64 
,279,122  49 
,388.313  02 
1.452,484  38 
603.854  43 
746,549  69 
.873.119  63 
1.988,619  41 
1.996.104  73 
1.634,104  27 
..538.737  03 
87  63 


.  839.441  15  Total. 


i  liible  lire  slated  as  "  gross  "  receipts— i". 


received,  and  sometimes  io  subsequent  years.   'J'be  aggregate 


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